Income Tax Appellate Tribunal - Indore
Rajshree Finsec Private Ltd., ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER
SHRI R.C. SHARMA, ACCOUNTANT MEMBER
M/s Rajshree Finsec Private Limited Indore
PAN -AACCR-2644G .....Assessee
Asstt.Commissioner of Income Tax
5(1), Indore .....Respondent
Assessee by : Shri S.N. Agrawal
Respondent by : Shri Arun Dewan
Date of hearing 11.01.2012
Pronounced on 06.02.2012
O R D E R
PER JOGINDER SINGH The assessee has preferred this appeal against the order of the learned Commissioner of Income Tax (Appeals) dated 16.4.2010 on 7 grounds. However, ground nos. 1, 2, 5, 6 and 7 were not pressed at the time of hearing. These grounds are, therefore, dismissed as not pressed. In this scenario, the only grounds left for our consideration are ground nos. 3 and 4 to the effect that the learned Commissioner of Income Tax (Appeals) was not justified in confirming the order of the Assessing Officer holding that the sum of Rs. 30 lacs was assessable as cash credit of the assessee without appreciating the fact that the said sum towards share application money cannot be charged to income tax under section 68 of the Act.
2. During hearing, we have heard Shri S.N. Agrawal, learned counsel for the assessee who submitted that identity of share subscribers/share applicants has been proved, therefore, in view of the decision in the case of decision of the Hon'ble Supreme Court in the case of Lovely Exports (P) Ltd. (2008) 172 Taxman 44, no addition u/s 68 of the Act could be made in the hands of the present assessee, whereas the learned Senior DR, Shri Arun Dewan, defended the impugned order.
3. We have considered the rival submissions and perused the material available on file. Brief facts of the case are that the assessee company declared total income of Rs.70,212/- in the return of income filed on 11.3.08. The Assessing Officer issued notices u/s.143(2) on 18.9.08 which were served on the assessee within the prescribed period. Thereafter, a detailed questionnaire along with notice u/s.142(1) was issued on 28.7.2009 to the assessee which was responded by the assessee.
During the course of assessment proceedings, after examining the submissions of the assessee and the balance sheet, the Assessing Officer observed that during the year under consideration, the assessee has shown receipt of share application money from various companies as follows :-
S.No. Party's Name Address PAN No. Amount
1. Shrilal Traders Pvt. Ltd. 47, Bhupendra Bose Avenue, 2nd Floor, Kolkata AAICS8140G 3,00,000/-
2. Lakeview Vinimay P. Ltd. 202, Jessore Road,Shyam Lake Garden Block-B, Shop No.5, Kolkata AABCL1392G 10,00,000/-
3. Saharsh Suppliers Pvt. Ltd. 25B, Raja Raj Ballav Street, Ground Floor, Kolkata AAICS5014K 7,00,000/-
4. Ambition Tie-up P. Ltd. 25B, Raja Raj Ballav Street, Ground Floor, Kolkata AAFCA5571Q 10,00,000/-
3.1 The Assessing Officer required the assessee to furnish evidences regarding identity, creditworthiness and genuineness of the share applicants. In response to the same, the assessee submitted details and addresses of the companies from whom it has received share application money. Later on, notices u/s 133(6) were issued to the above companies to file confirmations, balance sheet and copies of bank accounts. But all the notices returned back unserved with the remark 'not found'. Vide order sheet entry dated 22.09.09, the assessee was confronted and also was asked to produce the share applicants because no reply of the notices u/s 133(6) was received. However, on 27.10.09 the assessee filed the copies of assessee's bank accounts in two banks and submitted that there was no other bank account of the assessee. He also submitted that it is not practicable to produce the directors of the companies of Kolkata. The assessee also did not produce the copies of the bank statements of the share applicants. On 10.11.09 Shri Deepak Kalani, Director of the company attended and his statement on oath was recorded and placed on record.
During the course of statement of the director of the company, he was asked vide question no. 9, to explain the reasons of investment in his company by the share applicants, whereas the income of the was very low. In reply, surprisingly, Shri Deepak Kalani could not provide any explanation regarding these facts. The assessee also could not explain huge cash deposits in the bank account of the company looking into the nature of his business and submitted that he will provide clarification later. Meanwhile, confirmations from the above share applicants were filed before the Assessing Officer after two months from the date of issuance of notices u/s 133(6). It was noted by the Assessing Officer that one share applicant namely M/s Lakeview Vinimay Pvt. Ltd. admitted that the shares have been allotted before 31.03.07. The learned Assessing Officer was of the view that the financial capacity of share subscribers was not sound, therefore, he opined that it was the own money of the assessee. He was also of the view that the transactions are only manipulated transactions. The learned Assessing Officer was also of the view that it is a case of unaccounted income brought back into the books of accounts of the assessee company in a systematic and organized manner. He further observed that these companies have been used as mere conduit companies for routing of unaccounted money into the business in the garb of share application money. The source of share application money as received by the assessee company was treated as not properly explained. The learned Assessing Officer also observed that during the course of his statement, the director has himself admitted that the all the share applicants are either his friend or family members. The learned Assessing Officer was also of the opinion that these companies have no business whatsoever and these companies have been opened only for providing entries for share application money as well as unsecured loans. These companies are nothing but dummy companies closely held and acting on behalf of certain individuals, who are engaged in the business of providing entries for share application money to various parties. For this proposition, the Assessing Officer relied upon the decision of Hon'ble Madhya Pradesh High Court in the case of Commissioner of Income Tax Vs. Rathi Finlease Ltd.; 215 CTR (MP) 249 and decision of Hon'ble Calcutta High Court in the case of Commissioner of Income Tax Vs. Nividen Vanijya Niyojan Ltd.; 182 CTR (Cal) 605.
3.3 In view of the above, the Assessing Officer observed that since, the assessee has failed to prove the identity, genuiness and creditworthiness of the share applicants, the share application money of Rs.30,00,00/-
,as received by the assessee, in the year under consideration, is liable be added to the income of the assessee under section 68 of the Income Tax Act, 1961.
3.4 Felt aggrieved with the above action of the Assessing Officer, the assessee approached the learned Commissioner of Income Tax (Appeals), who required the assessee to furnish further explanation and lead evidences. The assessee filed detailed written submissions, in which it gave details of the share applicants i.e. address, PAN and has referred to further documentary evidences filed and compliances made by such share applicants before Assessing Officer is in response to notice u/s.133(6) issued. Copies of balance sheet of the assessee company for the year under consideration as well preceding two years and subsequent years were also filed and it was emphasized that the Directors of the assessee company Mr. Deepak Kalani and Pankaj Kalani CAs, were born and brought up in Kolkatta before coming to Indore and thus they were having business and social contacts at Kolkatta and the company being promoted by seasoned CAs having varied experience in finance and banking sector with strong business connections and was engaged in the business of loan syndication to corporate clients apart from business and investment activities.
3.5 It was also submitted that the decisions relied upon by the Assessing Officer were not applicable to the facts of the case and again emphasis was made to documentary evidences filed and receipt of money from banking channel. It was contended that the Assessing Officer failed to appreciate that in the facts of the assessee's case considering the compliance made, provision of section 68 should not have been attracted and reliance has been placed on the Hon'ble Supreme Court decisions in the cases of CIT vs. Steller Investment Limited (2001) 251 ITR 263 (SC) and CIT Vs. Lovely Exports (P) Ltd. (2008) 172 Taxman 44.
3.6 On consideration of the above facts and the submissions made by the learned counsel for the assessee, the learned Commissioner of Income Tax (Appeals) observed as under :-
"4.01 Coming to the facts of the case, the AO has clearly brought out relevant facts in the assessment order. The assessee miserably failed to explain and establish the soundness of the decision made by such alleged share applicants for making such substantial investment in the assessee company and some totally vague and unconvincing explanation was offered in this behalf. The AO has clearly made out a case that the share applicant companies were merely paper companies and were not genuine existing legal entities having the financial worth to have made such investment in the assessee company. It is further interesting to note that an amount of Rs.19,02,500/- which was shown as share application money pending allotment on balance-sheet date 31.3.07 continued to be so reflected till the end of next F.Y 31.3.08 and was reduced to Rs.18,30,000/- as on 31.3.09 there being no increase in share capital which stood unaltered at Rs.9,52,000/-.
The very fact that the huge amount of share application money was shown as outstanding as such without making necessary allotment of share itself speaks about the financial affairs and the nature of assessee's activity in the matter of managing such share application money. It is also worthwhile to note that in the written submissions a lot has been said about experience, contacts of the Directors and the varied nature of the business activities. But Profit before Income tax for A.Y. 2007-08, 2008- 09 and 2009-10 stood at Rs.58,643/-, 1,68,493/- and loss at Rs.3,35,051/- after considering huge F&O loss at Rs.32,98,314/- during F.Y. 2008-09.
4.02 The assessee in support of credit worthiness of share applicant Companies have referred to their net worth as on 31.03.07 as under:
(a ) Shri Lal Traders (P.) Ltd., Kolkata 317.31 lakhs
(b) Lake View Vinimay Ltd., Kolkata 424.58 lakhs
(c) Saharsh Suppliers Pvt. Ltd., Kolkat 385.71 lakhs
(d) Ambison Tie Up Pvt.Ltd., Kolkat 289.02 lakhs A closer examination of the Balance sheets & P & L A/cs of the aforesaid Companies for the year ended 31.03.2007 reveal the following:
A) Shri Lal Traders (P) Ltd.
(i) Share capital stands at Rs.16.80 lakhs and Reserve & Surplus at Rs. 300.52 lakhs and Application of Funds is made in Investment at Rs.284.46 lakhs and Loans and advances at Rs. 31.03 lakhs. The entire investment is made in Unquoted Pvt. Ltd. Companies . Note worthy among them are two of the above named share applicants itself namely Amsition Tie Up Pvt. Ltd. Rs.1.85 lakhs Lake View Vinimay Pvt.Ltd. Rs.4.37 lakhs
(ii) Profit & Loss A/c reveals that on sale and other receipts (Rs.72 lakhs + 30,886 interest on TDS ) final result is loss of Rs.3,198/-, line of business is stated as Trading in shares. Absolutely no income is accounted from either Investments or Loans & advances, which clearly suggests that these are accommodation entries entries only. (Copy of Balance sheet, P & L A/c schedule to Balance sheet/ & Investment details included Paper book on pages 26, 27, 28 & 33 are annexed to the appeal order as Annexure A 1 to A 4).
B. Lake View Vinimay Ltd.
(i) Share capital stands at Rs.2,,17,500/- and Reserve & Surplus stand at Rs.402.412 lakhs. The application of funds reveal Investment of Rs.261.99 lakhs and Loans & advances at Rs.165.31 lakhs. Investments are made entirely in Pvt. Ltd. Cos. and there is cross Investment of Rs.1,90,000/- in Sri Lal Traders Pvt. Ltd. against investment of Rs.4.37 lakhs made in this Company by Srilal Traders Pvt. Ltd. as noticed above.
(ii) P. & L. A/c reveal that on sale of Rs.46.52 lakhs and interest on loans at Rs.1,20,000/- , final net profit stands at Rs. 14,032/- only on such huge share holders funds of Rs.24.58 lakhs. Details of loans and advances again reveal that loans stand at Rs.10 lakhs and further advances are given for shares at Rs.154.95 lakhs. No income whatsoever is accounted from such huge investment in shares and advances given for shares exceeding Rs.4 crores which clearly suggests that these are only accommodation entries.
(Copy of Balance sheet, P.&L. A/c and Investment details as included in Paper book at page 84, 85, 86 and 91 enclosed at Annexure B 1 to B 4).
C) Saharsh Suppliers Pvt.Ltd.
(i) Share capital stands at Rs.20,22,000/- and Reserve & Surplus stands at Rs.364.50 lakhs , Investment stands at Rs.301.39 lakhs and Loans and advances at Rs.137.88 lakhs, in Unquoted Pvt. Ltd. Companies and one noteworthy investment is the investment in one of the share applicants' Ambition Tie Up P. Ltd. at Rs.5 lakhs. Other major portions of Loans and advances is against consists of Advance for shares at Rs.106.00 lakhs and loans stands at Rs.21.43 lakhs only.
(ii) The Company with such huge networth of nearly Rs. 4 Crores is having sales of Rs.13.19 lakhs only and interest on loans is reflected at Rs.2.35 lakhs and in the final results there is a loss and is no income is accounted for on investment in shares and advances given for shares which exceeds Rs.4 crores. (Copy of Balance sheet, P.& L. A/c and Schedule to Balance sheet and details of advance as included in Paper book at Page 180, 181, 182 and 187 are enclosed at Annexure C-1 to C-4). D) Ambition Tie Up P.Ltd.:
(i) Share capital stands at Rs.15.40 lakhs and Reserve & surplus stands at Rs.273.62 lakhs Investment in Unquoted Pvt. Ltd. companies stands at Rs.445.08 lakhs. The Company on sales of Rs.46.65 lakhs and interest of Rs.1.68 lakhs has earned net profit of Rs.3093 /- only and absolutely no income is accounted for from unquoted investments in Pvt. Ltd. Company which stands at Rs.4.45 crores and which again clearly suggests that there are only accommodation entries given. (Copy of Balance sheet and Investment details as included in Paper book at page 243, 244, 245 and 248 are enclosed with appeal order as Annexure D-1 to D-4).
The common feature which emerges from the above discussion is that all these Companies had broadly made entire investments in unquoted Pvt. Ltd. Companies from which no income whatsoever is being earned and even these Companies had cross investment in other Company and the turn over is not commensurate with the net worth of the Company and in these Companies there is either loss or negligible profit and is no worthwhile taxes have been paid by these Companies, commensurate with their net worth. Again most common striking similarity is Reserve & Surplus is more than 15-18 times of share capital, which in turn suggests that these companies have also raised share capital on substantial premium from dummy share holders / accommodation entries. It can thus be safely concluded that all these four companies are fictitious paper companies only.
4.1 Now, the legal contentions are examined. It is worthwhile to note that the observation made by Hon'ble Supreme Court while dismissing SLP in the case of Lovely Exports as has been reported as judgment delivered by the CTR at 216 CTR 295 has been simply stated to be dismissal of SLP in the oldest and still considered to be most leading and reliable Indian Tax Reporter on page 319 ITR 5,6 (statute) in following manner.
"Share application moneys received by company 11.1.2008- Their Lordships S.H. Kapadia and B. Sudershan Reddy JJ dismissed the Department's special leave petition against the judgment dated November 16, 2006 of the Delhi High Court in I.T.A No.953 of 2006 reported in 299 ITR 268, whereby the High Court affirmed the deletion by the Tribunal of additions made on account of sums received from directors of promoters and also by way of a public issue. The court while dismissing the special leave petition held as follows: "Can the amount of share money be regarded as undisclosed income under section 68 of the Income tax Act, 1961? We find no merit in this special leave petition for the simple reason that if the share application money is received by 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. Hence, we find no infirmity with the impugned judgment.' CIT v. Lovely Exports Pvt. Ltd. SLP (Civil) No.1153 of 2008." (emphasis supplied) There is no mention of admission / acceptance of SLP filed by the Department, nor issue of notices to opposite parties and thus SLP has been dismissed in limine without being admitted.
4.1.1 The aforesaid observations were made by Hon'ble Supreme Court, while dismissing SLP filed by the Department against judgment in CIT V. Divine Leasing & Finance Ltd., 299 ITR 268 (Del.) wherein it was held as under "No question of law, far less any substantial question of law arises for our consideration. We may, however, briefly reflect upon a submission made by learned counsel for the respondent to the effect that the assessee had, by its letter dated March 8, 1999, requested the Assessing Officer to examine the assessment records of the share applicants whose GR Nos. had been supplied. It is not controverted that action was not taken by the Assessing Officer, but it has justifiably been contended that this inaction was due to paucity of time left at that stage since the assessment had to be framed by March 31, 1999. It has been pointed out that several adjournments had been granted by the Assessing Officer on the asking of the assessee. The timing of the assessee's said letter is most suspect. Generally speaking, it is incumbent on the Assessing Officer to manage his schedule, while granting adjournments, in such a manner that he does not run out of time for discharging the duties cast on him by the statute. In the present case, the details had been furnished to the Assessing Officer much before March 1999, but he failed to react to the shifting of the burden to investigate into the creditworthiness of the share applicants. Therefore, the appeal is dismissed."
(emphasis provided ) 4.1.2 Further Hon'ble Delhi High Court has observed in the same judgment on page 278 of the report -
" Returning to Sophia Finance  205 ITR 98 (Delhi) the Full Bench which was now presided over by B.N.Kirpal J. (as the Chief Justice of India then was) had enunciated that section 68 reposes in the Income-tax Officer or the Assessing Officer the jurisdiction to inquire from the assessee the nature and source of the sum found credited in its books of account. If the explanation offered by the assesee is found not to be satisfactory further enquiries can be made by the Income-tax Officer himself, both in regard to the nature and the source of the sum credited by the assessee in its books of account, since the wording of section 68 is very wide. The full Bench opined that (page 105): "If the shareholders exist then, possibly, no further enquiry need be made. But if the Incometax Officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons ... If the shareholders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regarded as a capital receipt... but if .... the assessee offers no explanation at all or the explanation offered is not satisfactory then, the provisions of section 68 may be invoked." It will at once become obvious that the court had not reflected upon the questions as to: the party on whom; the extent to which; and the point of time when the onus could ,if at all, justifiably said to have shifted. This becomes clear from the last para on page 105 of the report.
This will depend on the facts of each case." It has been argued, but without substance, that the Full Bench did not go further than holding that the only responsibility on the assessee is to identify the subscriber; or that the Assessing Officer was not required to delve into the credit-worthiness of the
subscriber; or that the Assessing Officer need not be satisfied about the genuineness of the transaction."
"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 assessee 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 Assessing Officer 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 Income-tax Act."
4.1.3 Proceeding further, the Hon'ble Delhi High Court, in its later decision in the case of CIT V. Himalaya International Ltd. 214 CTR (Del) 437 where the decision in the case of Divine Leasing (supra) was considered , has held "Since, in the present case, the Tribunal has not gone into creditworthiness of the creditors and genuineness of the transaction, it is a fit case which ought to be remanded to the Tribunal to give its finding on these two issues."
4.1.4 Now, the provisions of section 68 of I.T.Act, which remain totally unaltered and unamended in more than 46 years of its existence on statute, reads as under:
" 68 Cash Credits Where any sum is found credited in the books of an assessee maintained for any previous year, and the 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."
4.1.5 The proposition of law laid down is very clear and well-established by various judicial decisions. The landmark judgment elucidating the nature of onus cast u/s.68 on an assessee is that of Shankar Industtries v. Addl.CIT (1978) 114 ITR 689 (Cal.). The principle laid down is to be found on page 698 in the following words:
"We would like to observe that the law on this point is now well settled. It is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of this creditor, the capacity of such creditor to advance the money and, lastly, the genuineness of the transaction. These things must be proved prima facie and only after the assessee has adduced evidence to establish prima facie in the aforesaid, the onus shifts on the department. In the instant case, it seems that the assessee established only the identity of the creditor and nothing more." (emphasis provided) Thus, the initial burden cast by section 68 on an assessee involves these things to be [cumulatively] proved prima facie. The condition of cumulatively proving all three ingredients is clear from the use of the words "These things" in the ratio reproduced above.
4.1.6 Coming to the use of the words "proved prima facie" in the ratio reproduced above, it may be made clear that the Law Lexicon compiled by T.P. Mukherjee incorporates the meaning of the words from the cited decisions as below:
"PRIMA FACIE. Even an obiter dictum of the Federal Court is binding upon the High Court and when a Superior Court held that an Act if "prima facie prospective" it is not open to subordinate courts to canvass the import or implication of that dictum. The use of the word "prima facie" would indicate that there is no possibility of an alternative construction being put on the Act, for it is on the face of it prospective- Nand Kishore v. Sukti Dibya, A.I.R 1933 Ori. 240 at 243: I.L.R 1953 24: 19 C.L.T.44".
4.1.7 Reverting back to the decision of the Hon'ble Calcutta High Court in the Shankar Industries case, the concept of shifting of onus from the assessee on to the AO and thereafter, could also be found elaborated in this decision. The Hon'ble Court reproduced following extracts, from its own decision in an unreported case of Knitting Machineries Syndicate (India) Pvt. Ltd. v. CIT decided on 6.9.1972, on pages 697 and 698 of the report:
"we find that by a series of decisions of different High Courts as well as of the Supreme Court it has been consistently laid down that when an assessee claims that he has borrowed money from a third party the initial onus lies on the assesee to establish (a) the existence of the third party; (b) the ability of the third party to advance moneys; and (c) that prima facie the loan is a genuine one. The assessee by proving these facts discharges the onus upon him. But that does not prevent the authority concerned to probe further into the matter and to investigate the case on materials available to the authority to come to an independent and unbiased finding as to the genuineness of the transaction. It is true that the tax authority is not entitled to reject the assessee's case summarily or arbitrarily or without sufficient reason. It is true that the authority's duty is to examine all the materials carefully and objectively. But it is found that the authority concerned after careful consideration of all relevant materials has come to the conclusion that the assesee's case of a loan from a third party cannot be accepted it is not open to this court to disturb the finding in reference under section 66(1)."
This precisely provides the concept of "shifting of onus" in a case covered by section 68 of the Act. 4.1.8 If the above principles of statutory onus on an assesee u/s.68 and of the shifting of such onus from the assessee on to the AO are applied to any case including the present assessee's case, the following position shall emerge. Prima facie proof of the three ingredients and that too cumulatively shall have to be examined at three different stages one after the other but if an assessee fails to establish at the first stage, the identity of the creditor itself, there is no question of an AO examining the matter at the second stage of ensuring and satisfying himself of the capacity of the creditor to advance the moneys and nor therefore, the AO examining the matter at third stage of ensuring and satisfying himself of the genuineness of the transaction. Had the assessee established prima facie the de facto existence of a creditor company, even then the onus lay on the assessee to further establish certain things because non-production of documentary evidence of corroborative value invites adverse inference against the person who ought to have produced it [CIT v. Krishnaveni Ammal (1986) 158 ITR 826 (Mad)]. When the asessee is pressing into service only the legal or dejure identity of a creditor and not at all coming up with any evidence of the de facto existence of the creditor company, he has completely failed even to prima facie establish the de facto existence of the creditor company. The de jure existence is a mere convenient façade of the de facto existence of the creditor company. Such de jure existence is self serving one, having been obtained through application and other forms and formalities unilaterally filed before the ROC. Such self serving evidences are also not entertained by courts as in the case of Bansidhar Agrawal Panna v. CIT , MP II (1984) 148 ITR 523 (MP). Hence such legal evidence is no more than a mirage because of AO's findings about non-existence of such companies at given addresses despite field enquiries made and repurchase of shares issued to both such Kolkata based companies on same date i.e. on 10.12.08 by Shri Suresh Mehta (16000 shares) , Smt. Anita Mehta (10000 shares) at Rs.10 i.e. face value on common date 10.12.08 at 10% of the price at which such shares were offered nearly 1 year back and there being no such event in intervening period to warrant diminution in value of company by 90%.
Thus, it is clear that whether the explanation offered by the assesee is satisfactory proof of the credits is a question of fact and the finding of the authority that it is a satisfactory explanation is a finding of fact. The present assessee assessee is running away from the AO in the matter of establishing the matter of factly existence of share capital contributing companies and taking shelter to legal contentions only.
4.1.9 On such facts, there is no question of the AO again rushing on its own to the banks where also accounts are opened in the such company's names. Further, the identity, capacity and genuineness aspects are not water tight compartments. An assessee's explanation of the nature and source of the credits cannot be entertained and held by the AO as satisfactory unless and until the ground reality i.e. the de facto existence of the creditor is first established prima facie paving the way for the AO to examine further the capacity and genuineness aspects. Hence merely based on arranged affairs and supporting documents, the identity cannot be said to be established, and in any case NOT the CAPACITY and GENUINENESS of transaction. The AO as discussed above has clearly established the two individuals to benami persons on behalf of one of the Director.
4.2 It has been further established by a series of decisions that the conclusion whether a cash credit in the books of account of an assessee is properly explained or not is a question of fact [CIT V.S.Nelliappan (1967) 66 ITR 722 (SC); CIT V. Manick Sons (1969) 74 ITR 1, 6(S ). Also see, Jadunandan Sahu Deokisanram V. CIT (1984) 16 ITR 175 (Pat); Hari Chand and Prem Chand Bassi V. CIT (1974) 94 ITR 557 (Delhi); Lakshmiratan Cotton Mills Co. Ltd. V. CIT(1972) Tax LR 585(All); Ram Kumar Jalan V.CIT. Further, whether the explanation offered by the assessee is a satisfactory proof of the nature and source of the cash credits is a question of fact and the finding of the authority that it is a satisfactory explanation is a finding of fact [CIT V. Ghewarchand Kamalkumar (1977) 108 ITR 398 (Ori); R.Dalmia V. CIT(1978) 113 ITR 522(Del.) 4.2.1 Further reference in this respect may be made to often referred and relied decision of Hon'ble Supreme Court in the case of CIT V. Orissa Corporation Pvt. Ltd. 159 ITR 78 Wherein also it was held " that in this case the respondent had given the names and address of the alleged creditors It was in the knowledge of the Revenue that the said creditors were income tax assessee. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under section 131 at the instance of the respondent, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were creditworthy. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the respondent could not do anything further. In the premises, if the Tribunal came to the conclusion that the respondent had discharged the burden that lay on it, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion was based on some evidence on which a conclusion could be arrived at, no question of law as such arose. The High Court was right in refusing to state a case." (emphasis supplied) 4.2.2 It is further settled position of law that no burden lies on the Department to show that other source of income was derived from a particular source. Where there is an unexplained cash credit, it is open to the Assessing Officer to hold that it is income of the assessee and no further burden lies on the Assessing Officer to show that income is from any particular source. It is for the assessee to prove that even if the cash credit represents income, it is income from a source which has already been taxed [CIT V. Devi Prasad Vishwanath Prasad, (1969) 72 ITR 194(SC); CIT V. Madhavnagar Cotton Mills Ltd. (1976) 104 ITR 493 (Bom); Roshan Di Hatti V. CIT (1977) 107 ITR 938 (SC); CIT V. Daluram Pannalal Modhi (1981)129 ITR 398(MP)]. For the purpose of bringing such amount to tax, the enquiry whether the income was from a business activity or from other sources is not relevant [CIT V. Durga Prasad More(1969) 72 ITR 807 (SC)].The principle laid down in CIT V. M. Ganapathi Mudaliar [(1964) 53 ITR 623 (SC)], that once it is found that a receipt by the assessee was income of the assessee it is not necessary for the revenue to locate its exact source applies alike to cases in which an entry is found in the books of accounts of the assessee as to cases in which no entry is found [CIT V.Durga Prasad More (1969) 72 ITR 807(SC)].
4.3 Thus, to recapitulate, the correct position that emerges is that onus lies on the assessee to establish identity and creditworthiness of the loan/cash credits and genuineness of the transaction and in each case it has to be decided on consideration of totality of facts and circumstances of the case whether such onus has been discharged by the assessee or not and there is no burden on the AO to link up or establish the source of such credit to the known sources or activities in any manner. In view of such clear proposition of law, it has to be examined whether aforesaid brief decision of Hon'ble Supreme Court in Lovely exports(supra) dismissing the SLP simpliciter after condoning delay with brief observation can be read and understood as laying down the proposition of law as canvassed by the assessee / assessees that even if the contributions of share capital is / are bogus / by non existent persons / entity of no means, no addition can be made in the hands of the assessee/ assessee company, whether such sum are found credited as contribution to share capital /share application money in the name of non-existent / bogus persons/ entity of prima facie no means or doubtful creditworthiness.
4.3.1 Before proceeding further, it will be appropriate to examine the preposition of law laid down in various Supreme Court decisions itself to the effect as to what constitutes the law laid down where SLP is dismissed without formulating the substantial question of law and recording arguments of both the sides of such substantial question of law in deciding the appeals.
(a) Hon'ble Supreme Court in the case of V.M.Salgaonkar & Bros Pvt. Ltd. 243 ITR 383 (SC), Held:
"When a appeal is dismissed by the Supreme Court by a non-speaking order, the order of the High Court or the Tribunal from which the appeal arose, merges with that of the Supreme Court. In such a case, the Supreme Court upholds the decision of the High Court or the Tribunal from which the appeal is provided under clause (3) of article 133 of the Constitution"
(b) Hon'ble Supreme Court in the case of Kunhayammed and others V. State of Kerala 245 ITR 360 considered the point in issue about the doctrine of merger held that once a S.L.P. has been granted, the doors for the exercise of appellate jurisdictions of this Court have been let open. The order impugned before Supreme Court became an order appealed against. Any order passed thereafter would be an appellate order and would attract the applicability of the doctrine of merger. It would not make a difference whether the order is of reversal or of modification or of dismissal affirming, the order appealed against. It would also not make any difference. Hon'ble Supreme Court while summing up the conclusions, Held:
" (i) "Where an appeal or revision is provided against an order passed by a court, tribunal or any other authority before a superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law.
(ii) The Jurisdiction conferred by article 136 of the Constitution is divisible into two stages. The first stage is up to the disposal if the prayer for special leave to file an appeal. The second stage commences if and when the leave to appeal is granted and the special leave petition is converted into an appeal.
(iii) The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it. Under article 136 of the Constitution, the Supreme Court may reverse, modify or affirm the judgment decree or order appealed against while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing of a petition for special leave to appeal. The doctrine of merger can, therefore be applied to the former and not to the latter.
(iv) An order refusing special leave to appeal may be non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the court was not inclined to exercise its discretion so as to allow the appeal being filed.
(v) If the order refusing leave to appeal is a speaking order, i.e. gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration law by the Supreme Court within the meaning of article 141 of the Constitution.
Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court, which would bind the parties thereto and also the court, tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the
apex court of the country, But this does not amount to saying that the order of the court, tribunal or authority below has stood merged in the order of the Supreme Court rejecting the special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.
(vi) Once leave to appeal has been granted and the appellate jurisdiction of the Supreme Court has been invoked the order passed in appeal would attract the doctrine of merger; the order may be of reversal; modification or merely affirmation.
(vii) On an appeal having been preferred or a petition seeking leave to appeal having been converted into an appeal before the Supreme Court the jurisdiction of the High Court to entertain a review petition is lost thereafter as provided by sub-rule (1) of rule I of Order XLVII of the code of Civil- Procedure." (Emphasis Provided)
(c) Hon'ble Supreme Court in the case of S. Shanmugavel Nadar, 263 ITR 658 (SC) by following the decision in the case of Kunhayammed and other (supra) Held:
"Though loosely an expression " merger of judgment, order of decision of a court or forum into the judgment, order or decision of a superior forum" is often employed, as a general rule, the judgment or order having been dealt with by a superior forum and having resulted in confirmation, reversal or
modification, what merges is the operative part, i.e. the mandate or decree issued by the court which may have been expressed in positive or negative form. The application of the doctrine depends on the nature of the appellate or revisional order in each case, the scope of the statutory provisions
conferring the appellate or revisional jurisdiction and the content and subject matter of challenge laid or which could have been laid.
Apart altogether from the merits of the grounds for rejection, the mere rejection by a superior forum resulting in refusal to exercise its jurisdiction which is invoked cannot by itself be construed as the imprimatur of the superior forum on the correctness of the decision sought to be appealed against.
Article 141 of the Constitution of India speaks of declaration of law by the Supreme Court: for a declaration of law there should be a speech, i.e. a speaking order. A decision which is not express and is not founded on reasons nor on consideration of the issues, cannot be deemed to be a law declared, to have binding effect as is contemplated by article 141. A summary dismissal by the Supreme Court, without laying down any law, is not a declaration of law envisaged by article 141.
When reasons are given the decision of the Supreme Court would be binding on all courts within the territory of India: when no reasons are given, dismissal simpliciter is not a declaration of law by the Supreme Court. "
(Emphasis provided) 4.3.2 Further, the Hon'ble Supreme Court has held in the case of CIT V. Sun Engineering Pvt. Ltd. 198 ITR 297 as under:
" It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision."
4.3.3 Still further, the Hon'ble Supreme Court in the case of Padma Sundara Rao (Deceased) and others v. State of Tamil Nadu and Others 255 ITR 147 as emphasized " The court cannot read anything into a statutory provision which is plain and unambiguous. A statute is the edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must be found in the words used by the Legislature itself.
Courts should not place reliance on decisions without discussion how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they were words in a legislative enactment. Judicial utterances are made in the setting of the setting of the facts of particular cases. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases."
4.3.4 Now it is to be noticed that Hon'ble M.P. High Court in its latest and recent Judgment on the issue in the case of CIT V. Rathi Finlease Ltd. 215 CTR (MP) 429 has held as under:
" Without considering that the payments were made by each creditors by first depositing a sum of Rs. 5,00,000/- and then issuing a cheque for the purchase of the shares and that the companies were not found to be in existence, the Tribunal has hastened to come to the conclusion that addition was not justified. In coming to this conclusion, the Tribunal has observed that since AO had himself examined the bank accounts of three subscribing companies and found that there were numerous transactions, the genuineness of the transaction could not have been assailed. Section 68 enjoined the assessee to offer an explanation about the nature and source of the sum found credited in his books and if the explanation was not satisfactory, the amount can be credited and charged to income as income of the assessee. Since the assessee, though tried to explain the genuineness of the credit on the basis of letters of confirmation, it could not be explained as to how the transaction was materialized when the companies were not in existence and the amount was paid by cheque only on the date on which the amount was credited to the account of the company. It was for the assessee to discharge this burden. Therefore, the assessee failed to discharge the burden with regard to the credit in its book and the existence of the creditors to indicate the genuineness of the transaction -
CITV. Steller Investment Ltd. (2000) 164 CTR(SC)287 (2001) 251 ITR4 263(SC) and CIT V. Antartica Investment (P) Ltd. (2003) 179 CTR (Del) 526: (2003) 262 ITR 493(Del) distinguished."
4.3.5 It may be recalled that similar contentions were advanced from the side of assessee/assessees placing reliance on the judgment of Hon'ble Supreme Court in the case of CIT V. Stellar International Ltd. 251 ITR 263(SC) which has been considered by Hon'ble M.P. High Court in arriving at the aforesaid conclusions. Thus, it has to be necessarily concluded that it will have to be considered and decided in every case by a quasi judicial authority involving application of provision of section 68 in the matter of contribution of share capital / share application money whether the onus case on the assessee / assessees has been discharged or not in accordance with law on appreciation of totality of evidence available on record and surrounding facts and circumstances of the case. It may also be noted that Hon'ble Supreme Court in the case of CIT V. P. Mohankala 291 ITR 278 (SC) while examining the provisions of section 68 has held that when the explanation offered by assessee is not found to be satisfactory and proper that will be a case of offering no explanation by the assessee. In this case while in its earlier two decisions namely CIT V. Durgaprasad More 82 ITR 540 and Sumati Dayal V. CIT 214 ITR 801, the Hon'ble Supreme Court has clearly laid down the preposition of law that in appreciating documents, evidence and evidence on record, the Court can not be oblivious to the surrounding facts and circumstances of the case and human probabilities. Therefore, the assessee assessee cannot derive any support from the decision of the Hon'ble Supreme Court in the case of Lovely Exports & Other (supra.) and for that matter much support from other reported decision except to the extent of broad preposition of law as analysed and discussed above.
4.4 The detailed legal contention of the assessee have been examined above. Now reverting back to the facts of the case, the assessee is a private limited company.
4.5 Section 3 of Companies Act, 1956, defines "private company" as under:
(iii) "private company" [means a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed, and by its articles,-]
(a) restricts the right to ......
(b) limits .............
© Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company:
(d) Prohibits....] ........ as a single member Clause (c) as above, makes it clear that the subscribers to shares of private company cannot be from public. It, therefore, follows that the subscribers to shares of private company can be only private persons. Such private persons must invariably be persons of confidence and acquaintance of directors of private company and there should be normally, no difficulty in producing them before the AO. And in case, they are not produced, the natural corollary is that the real position is not the same as emerges form papers and documents furnished in this behalf.
The company very tactfully and intelligently has tried to overcome the condition of inviting subscription from public. In reply to query from this office to establish genuineness of transaction, it has been admitted by the Assessee that no dividend was distributed and such share applicant companies are found to be dummy / paper companies as discussed in para 4.02 above. Further, investment of almost entire networth by all the four share applicant companies in Pvt.Ltd. companies, that too at premium, where from neither was return is assured, nor safety of investment was guaranteed, not to speak of capital appreciation and lastly such investment being totally illiquid, defies all logic and rational of conventional investment decision making process. Such investment decision can not be taken by any genuine company, who would be interested in both protecting its investment and earning a decent return on such investment. Thus, it has to be necessarily concluded that these companies engaged them selves in providing bogus share capital by way of accommodation entries to wiling tax evaders.
4.5.1 From the facts available, it prima facie transpires that the company itself contacted these alleged investors to utilize their names in the garb of prospective share holders. No proof of making any correspondence or inquiry with the company by these investors before investing in shares of the company has been produced on record despite specific requisition even in appeal proceedings.
4.6 It will be appropriate to take notice of the commonly known notorious facts about the modus operandi of the converting unaccounted funds by the Promoters and Directors of the company by first inviting such share application from willing dubious entities and then acquiring back the same at an agreed price which is normally too low compared to the issue price and there being no rational for selling of such shares for such low price by the initial contributors. Reference can be made to the following decisions:
(a) CWT v. Rohtas Industries Ltd., 67 ITR 283 (SC), wherein it was held that "In the absence of any direct evidence, a judicial or quasi-judicial Tribunal can base its conclusions on the basis of what are known as notorious facts bearing in mind the principles of section 144 of the Evidence Act."
(b) Attar Singh Gurmukh Singh v. ITO 191 ITR 667(SC) wherein, while interpreting the provisions of section 40A(3), it was held that "In interpreting a taxing statute, the court cannot be oblivious of the proliferation of black money which is under circulation in our country."
4.7 Before concluding, it will be only proper to take note of the following recent decisions from Hon'ble ITAT, where in even after taking note of the decision of Hon'ble Supreme Court in the case of Lovely Exports (Supra), it has been held that onus still rests on the assessee to establish
genuineness of share application transactions besides establishing Identity & Credit worthiness of such share applicants. AO's power and duty to investigate the reality and genuineness of transactions has also been recognized and emphasized.
I. GOLD LEAF CAPITAL CORPORATION OF INDIA LTD. VS JCIT 308 ITR (AC) 94 (DELHI) II. ITO VS CHANDIGARH THEATERS (P.) LTD 125 TTJ (CHD) III. MOTLAY FINANCE (P.) LTD VS ACIT- ITAT INDORE BENCH. (ITA NO. 96/IND/48 DECIDED ON 28/01/07)
4.8 Thus, on overall consideration of the facts and circumstances of the case and as discussed in detail above, the amounts claimed to be received by the assessee do not in any way appear to be genuine share capital. They are nothing but arranged affairs being pre-ordained series of transactions and tax evasion device where money laundering transactions have been camouflaged as share application money. Hence no credence can be placed on the copies of various documents filed to support such claim of share capital contribution and addition of Rs.30 lakhs is hereby confirmed."
4. We have considered the rival submissions and perused the material available on file. Under the aforementioned facts/observations made in the assessment order/impugned order and the assertion made by the learned respective counsels, during hearing the learned counsel for the assessee invited our attention to the reply dated 5.12.2011 (page 465 of the paper book) to the effect that summons (page 463) were issued to the share applicants, requiring certain information u/s 131 of the Act, the share applicants duly confirmed that Srilal Traders Private Limited (share applicants) gave Rs. 3 lacs to the assessee during financial year 2006-07 as share application money through cheque no. 295383 dated 28.4.2006 drawn on HDFC Bank, Calcutta, meaning thereby the identity of the share applicants was proved.
It is further noted that the summons sent u/s 131 dated 28.11.2011 to the share applicants were duly received, therefore, it can be said that their address was also confirmed. The share applicants have also filed the copies of the bank statements. Likewise, summons dated 28.11.2011 were also issued to Lake View Vinimay Private Limited which were duly received and vide reply dated 3.12.2011 addressed to the Dy. Director of Income Tax (Investigation) they duly confirmed payment of Rs. 10 lacs vide cheque no. 126786 and 126785 both dated 26.4.2006 (each Rs. 5 lacs) and the said reply is duly acknowledged by the office of the Directorate of Income Tax Department (Investigation), Kolkata, on 5th December, 2011. The share applicants have also furnished copies of bank statements along with acknowledgement of the return. The summons were also issued on 28.11.2011 to Saharsh Suppliers Private Limited, which were duly received, and confirmation was also filed with the Directorate of Income Tax (Investigation) on 7th December, 2011 as is evident from the seal of the department affixed on these papers. That party also filed the confirmation letter confirming the payment of Rs. 7 lacs through account payeed cheque no. 000036 dated 28.4.2006. We further find that the summons dated 28.11.2011 issued to Ambition Tie Up Private Limited were duly served by the department and in compliance thereof, they confirmed the payment of Rs.10 lacs, in the form of share application money vide cheque dated 24.4.2006 along with copy of bank statement and copy of acknowledgement of filing of income tax return. All these documents clearly prove their identity if the summons would not have been received or the addresses of the share applicants would have been fake, there was no question of service of summons and consequent reply by such share applicants. Under these facts, it can be said that their identity is proved. In view of these facts, the decision from Hon'ble Apex Court in the case of Lovely Exports Private Limited, 18 ITJ 717 clearly comes to the rescue of the assessee, the relevant portion of the same is reproduced hereunder :-
""Share application moneys received by company 11.1.2008- Their Lordships S.H. Kapadia and B. Sudershan Reddy JJ dismissed the Department's special leave petition against the judgment dated November 16, 2006 of the Delhi High Court in I.T.A No.953 of 2006 reported in 299 ITR 268, whereby the High Court affirmed the deletion by the Tribunal of additions made on account of sums received from directors of promoters and also by way of a public issue. The court while dismissing the special leave petition held as follows: "Can the amount of share money be regarded as undisclosed income under section 68 of the Income tax Act, 1961? We find no merit in this special leave petition for the simple reason that if the share application money is received by 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. Hence, we find no infirmity with the impugned judgment.' CIT v. Lovely Exports Pvt. Ltd. SLP (Civil) No.1153 of 2008." (emphasis supplied) If the aforesaid conclusion drawn by the Hon'ble Apex Court is kept in juxtaposition with the facts of the present appeal, it can be said that the identity of share applicants was proved. In view of these facts, it can be said that if the department still finds such applicants to be bogus, they are free to reopen their individual assessments but certain no addition can be made u/s 68 of the Act in the hands of the assessee company.
5. During hearing the learned Senior DR contended that the issue is covered by the decision of the Tribunal in the case of M/s Agrawal Coal Corporation decided by this Bench on 31st October, 2011 in ITA Nos. 151/Ind/2009, 283, 136 and 34/Ind/2010, 190/Ind/09, 158/Ind/2010 etc. We are not agreeing with this proposition because in that case the identity of such share applicants was not proved and even the addresses of such share applicants were found non-existent/bogus.
In view of those facts, this Bench concluded that the decision from Hon'ble Apex Court pronounced in Lovely Exports Private Limited is not applicable and the addition was confirmed in the hands of the assessee.
However, in the present appeal, since the identity of such share subscribers, as we have discussed above, was established, therefore, no addition u/s 68 is warranted in the case of the assessee company. So far as the decision from Hon'ble jurisdictional High Court in the case of CIT vs. Rathi Finlease Limited (2008) 215 CTR (MP) 249 is concerned, in that case, despite several opportunities, the assessee was unable to provided confirmations from the concerned parties, therefore, the Hon'ble Court reached to a particular conclusion, whereas in the present appeals, the identity of share applicants, namely, M/s. Shrilal Traders Private Limited, M/s Lakeview Vinimay Private Limited, M/s Saharsh Suppliers Private Limited and M/s Ambitions Tie Up Private Limited was established, therefore, in view of the decision from Hon'ble Apex Court in the case of Lovely Exports Private Limited (supra), this judicial decision from Hon'ble High Court may not help the revenue.
6. So far as the argument of the learned Sr. DR and the objections/observations of the learned Assessing Officer/learned Commissioner of Income Tax (Appeals) that these are paper companies only, the contention raised on behalf of the assessee is that the net worth (as on 31.3.2007) of such share subscribers is Rs. 317.31 lacs, Rs. 424.58 lacs, Rs. 385.71 lacs and Rs. 289.01 lacs. We are not going on the issue of worth of these share applicants because the Hon'ble Apex Court in the case of Lovely Exports Private Limited (supra) held that even if such share applicants are bogus, but their identity is proved, then no addition is warranted in the case of the assessee. So far as the decisions cited in the impugned order are concerned, in view of the decision from Hon'ble Apex Court in the case of Lovely Exports (supra), has remained for academic interest only, being on different facts, therefore, we are refraining ourselves in dealing with each and every case individually, especially in the light of the evidences, filed by the assessee, evidencing that the identity of such share applicants was very much proved by further filing of confirmation by them.
7. In view of these facts, the decision from Hon'ble Apex Court in Lovely Exports (supra) and uncontroverted fact that the summons issued to the impugned share applicants were duly received by them with further filing of confirmation by such share applicants, at least their identity is proved,
therefore, this appeal of the assessee deserves to be allowed. Finally, the appeal of the assessee is allowed.
Order pronounced in open Court on 6th February, 2012.
(R.C. SHARMA) (JOGINDER SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
February 6, 2012
Copy to Appellant/Respondent/CIT/CIT(A)/DR Dn/-