ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS
F Where AO accepting nil return of assessee and allowing claim to deduction u/s. 80-IA without enquiry whether assessee fulfilled conditions for eligibility, revision proper : Vodafone Essar Ltd. v. CIT (Chandigarh) p. 147
F Capital gains : Advance received under first agreement and forfeited and sums received as damages together constitute part of consideration for sale, taxable : Hyderabad Bottling Co. Ltd. v. Dy. CIT (Hyderabad) p. 175
F Tribunal inadvertently miscalculating number of AYs for which exemption available, mistake to be rectified, earlier order recalled : Asst. CIT v. Qmax Test Equipments P. Ltd. (Chennai) p. 187
F Non-resident : Technical fee paid to carry out business outside India for earning income from a source outside India not liable for TDS : Aqua Omega Services P. Ltd. v. Asst. CIT (Chennai) p. 191
F Capital gains : Where no agreement signed or possession delivered in relevant year, gains cannot be taxed in that year : Addl. CIT v. Delhi Apartment P. Ltd. (Delhi) p. 217
F Where no evidence that borrowed capital used for purchase of land for agricultural purposes, surplus realised on asset to be taxed as capital gains : Addl. CIT v. Delhi Apartment P. Ltd. (Delhi) p. 217
F Non-resident : Royalty paid by OEMs to assessee not taxable : Qualcomm Incorporated v. Addl. DIT (Delhi) p. 239
F Where income from different products manufactured under same licence agreement, CIT (Appeals) entitled to enhance income u/s. 251 : Qualcomm Incorporated v. Addl. DIT (Delhi) p. 239
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party without application of mind by AO is not validReopening solely on basis of objection of audit
As is more than apparent, assessmentwas completed on scrutiny. In postassessment period, audit party raised the objection and Assessing Officer had strongly objected to such objections by communicating internally as mentioned hereinabove.
In such background, reasons for reopening if are noted, they are almost identically worded as that of audit report. No material worth the name emerges to indicate any independent application of mind. Facts are quite glaring on the contrary & they clearly establish absence of subjective satisfaction of Assessing Officer. Thus, the ground raised by the petitioner that such notice of reopening is invalid for the Assessing Officer having not formed his independent belief requires to be sustained.
HIGH COURT OF GUJARAT
Jagat Jayantilal Parikh
v.
Deputy Commissioner of Income-tax
Special Civil Application No. 16062 of 2012
Date of Pronouncement – 28.02.2013
JUDGMENT
Ms. Sonia Gokani, J. – The petitioner is an individual assessed in the same status for last several years under the Income-tax Act, 1961 (for short, hereinafter referred to as "the Act"). The petitioner herein has challenged the validity of the notice issued under Section-148 of the Act dated 21.11.2011, seeking to reopen the assessment framed by the Assessing Officer on scrutiny under Section-143(3) of the Act for the Assessment Year 2007-2008. The facts & details for appreciating the issue raised by the petitioner herein in the present petition under Article 226 of the Constitution of India are as under.
1.1 The petitioner, in the Assessment Year 2007-2008, declared his total income of Rs.1,89,040/- in the return filed by him under Section 139 of Act. The statement of income and audit report under Section 44AB accompanied the return. In the audit report, under the heading of "Money Market Trading Account-Tax Free" reflected computation of the transaction. The petitioner had claimed a net loss of Rs.13,22,953.43 in one account. All other accounts clubbed together had shown a net loss of Rs.11,52,464/-.
1.2 A notice under Section 143(2) was issued on 30.10.2009. A letter was addressed by the petitioner-assessee to the Assessing Officer on 09.11.2009, inter alia, urging that qualitative particulars along with valuation had already been furnished in terms of the account. On the basis thereof, the Assessing Officer completed scrutiny assessment under Section 143(3) & passed an order on 14.12.2009.
1.3 Subsequent thereto, it emerges from record that the audit objection in this regard was raised. The Assessing officer, of course, did not agree with office objection. However, on 21.11.2011, the petitioner received a notice under Section 148 of the Act for reopening of the assessment on the ground that the income of the petitioner has escaped the assessment & he was directed to file his return within 30 days.
1.4 The return was submitted by the petitioner and the ground was raised in the communication dated 20.12.2011 that such reopening was in direct response to the audit objection which was untenable as advance sale securities is a regular feature in the petitioner's business. Request was made for furnishing of copies of return. The reasons were furnished vide letter dated 22.08.2012 which are required to be reproduced as under:
"It is seen that you had returned gross total salary income of Rs.2,99,040 and gross business loss of Rs.15,85,666 as per the statements of computation of total income. It is further, noticed that you have debited an amount of Rs.1,24,31,189 towards "provision for purchase" (short sale-inclusive of interest) in the Money Market Trading Account and out of this, an amount of Rs.52,65,699/- had been credited towards "provision for purchases reversed." The net loss of Rs.13,22,953.43 of thisMoney Market Trading Account was debited to the Profit & Loss Account and net business loss of Rs.11,52,464/- was taken for computation of business income. After adjustment of various items depreciation etc. the net business loss of Rs.15,85,666 was claimed to be carried forward for set off in future assessment years. Thus, allowance of net provision of Rs.71,65,489.92 (1,24,189.18-52,65,669) was not therefore, laid out or expended wholly and exclusively for the purpose of business profession and was, therefore, not an admissible expenditure leaving a provision only. Thus there was escapement of taxable income for the assessment year 2007-2008, and as such notice u/s. 148 has been issued."
1.5 Objections were filed by the petitioner on 05.09.2012 wherein it is emphasized that the said notice is nothing but a mere change of opinion on the part of the Assessing Officer. Instead of dealing with these objections and pass any order, Assessing Officer passed straightway anassessment order dated 17.10.2012 making an addition of Rs.71,65,490/- and sent a demand notice dated 17.10.2012 of Rs.34,96,100/-.
1.6 Resultantly, this petition with a prayer to quash and set aside the notice.
2. On issuance of notice to the other side, affidavit-in-reply has been filed by the Deputy Commissioner, Income-tax, denying all averments of the petition. It is urged that the notice has been issued as the income chargeable to the tax has escaped the assessment and the reasons recorded are also provided for such reopening. The assessee also appeared during the re-assessment proceedings and sought various details. It is further contended that the assessee-petitioner had not objected to such reopening. It is only after tax liability fixed to the tune of Rs.34,96,100/-, such objection have been raised.
2.1 It is further contended that the petitioner has also filed an appeal before the CIT (A) and on his having availed alternative remedy, this petition is not maintainable.
3. Heard learned senior counsel Mr. J.P. Shah with learned counsel Mr. M.J. Shah for the petitioner who submitted that the notice is based on one of the issues, already previously raised in the scrutiny assessment. The Assessing Officer had not applied his mind independently but acted on the objection of audit party and reopening, therefore, is based on the change of opinion only. Learned counsel has also taken a firm stand that while issuing notice for reopening theassessment, action has been initiated at the instance of the audit party and therefore also, notice is contrary to the well laid down ratio that any notice for reopening solely on the objection of audit party without application of mind, cannot be sustained. He further urged that even the basis of the plea that the income chargeable to tax has escaped assessment, lacks validity. It is urged further that the Assessing Officer has proceeded to frame fresh assessment without disposing of the objections of the petitioner separately and thereby, violated the ratio laid down by the Apex Court reported in GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19
4.1 Learned counsel Ms. Mauna Bhatt has objected to entertain this petition preferred under Article 226 of the Constitution of India. According to her, the Assessing Officer has independently examined the question. She has further submitted that the Assessing Officer had a reason to believe that taxable income since has escaped assessment, impugned notice requires no interference at this stage.
4.2 Learned counsel has also urged that the Assessing Officer, on the basis of the report of the audit party, has right to form his own opinion with respect to escapement of the income and only because the indication has come from the audit party, that itself cannot be the ground of holding the opinion of the Assessing Officer invalid.
5. Upon thus hearing both the sides and also on perusal of the original file of the Assessing Officer pertaining to the assessment in question, this petition requires to succeed for the following reasons.
5.1 As can be noted from submissions made by both the sides, on three grounds, challenge is made to the notice of re-assessment.
(i) On scrutiny assessment, the issue raised in the impugned notice has been finalized and therefore, this notice of reopening is nothing but only a change of opinion on the part of the Assessing Officer.
(ii) The Assessing Officer proceeded to frame fresh assessment without disposing of the objections by a separate reasoned order and thereby, violated the law on the subject.
(iii) Despite the initial disagreement of Assessing Officer to the objections raised by the audit party, this notice of reopening is issued only at the instance of the audit party.
5.2 Taking firstly, the last contention of the petitioner, it can be noted that for the Assessment Year 2007-2008, a return of income was filed by the petitioner on 31.10.2007, giving all details and statements coupled with the audit report. A notice was issued by the Assessing Officer under Section 143(2) on 30.10.2009 which was replied to on 09.11.2009. It also enclosed along with the monthly particulars of the trading in G-Security, MMD and Bonds by further mentioning that qualitative particulars with money value had already been given in the account. No further queries were raised and the assessment order was passed on 14.12.2009 on scrutiny, under Section 143(3) of the Income-tax Act taking into account all these aspects.
5.3 It appears that, subsequent to this, audit objections were raised in the following manner:
"Under Section 37 of the Income Tax Act, 1961, any expenditure, not being expenditure of the nature described in Section 30 to 36 and not being in the nature of capital or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profit and gains of business or profession.
The assessee, ShriJagatJayant Parikh, an individual, a dealer in securities, filed its return of income for the Assessment Year 2007-2008 on 30.10.2007 declaring total income, including salary income at Rs.1,89,040 under Section 143(1) of the Income Tax Act, 1961. The return was processed on 19.3.2009 accepting the same income. Thereafter, the return was selected for security under Section 143(3) and the same was finalized on 24.12.2009 determining total income Rs. 2,12,320.
Audit scrutiny of the assessment records revealed that the assessee had returned gross total salary income of Rs. 2,99,040 and gross business loss of Rs.15,85,666 as per the statement of computation of total income. It is, further, noticed that the assessee had debited an amount of Rs. 1,24,31,189.18 towards "Provision for purchase (short sale-inclusive of interest) in the Money Market Trading Account and out of this, an amount of Rs. 52,65,699.26 had been credited towards "Provision for purchase reversed." The net loss of Rs. 13,22,953.43 of this Money Market Trading Account was debited to the Profit and Loss Account and net business loss of Rs. 11,52,464 was take for computation of business income. After adjustment of various items including depreciation etc., the net business loss of Rs. 15,85,666 was claimed to be carried forward for set off in future assessment years.
Thus, allowance of net provision of Rs. 71,65,489.92 (1,24,31,189.18 – 52,65,699) was not, therefore, laid out or expended wholly and exclusively for the purpose of business or profession and was, therefore, not an admissible expenditure being a provisionally.
This resulted in irregular allowance of expenses of Rs. 71,65,490 involving short levy of tax of Rs. 32,07,832 as mentioned below"
5.4 On the basis of such audit objection, notice had been issued to the petitioner on 21.11.2012 under Section 148 of the Income-tax Act, 1961 without furnishing copy of reasons recorded for reopening the assessment. The same were supplied to the assessee on 29.08.2012. The reasons recorded are as follows:
"It will be appreciated that under section 37 of the Income tax act, 1961, any expenditure, not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure of personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business of profession shall be allowed in computing the income chargeable under the head "Profit and gains of business or profession.
It is seen that you are a dealer in Securities. You filed return of income for the A.Y.2007-2008 on 3.10.2007 declaring total income, including salary income at Rs.1,89,040. The return was processed on 19.03.2009 accepting the same income. Thereafter, the return was selected for scrutiny under section 143(3) and the same was finalized on 24.12.2009 determining total income at Rs.2,12,320.
It is seen that you had returned gross total salary income of Rs.2,99,040/- and gross business loss of Rs.15,85,666/- as per the statements of computation of total income. It is further noticed that you have debited an amount of Rs.1,24,31,189 towards "provision for purchase" (short sale-inclusive of interest) in the Money Market Trading Account and out of this, an amount of Rs.52,65,699/- had been credited towards "provision for purchases reversed". The net loss of Rs.13,22,953.43 of this Money Market Trading Account was debited to the Profit & Loss Account and net business loss of Rs.11,52,464/- was take for computation of business income. After adjustment of various items depreciation etc., the net business loss of Rs.15,85,666/- was claimed to be carried forward for set off in future assessment years. Thus, allowance of net provision of [Rs.71,65,489.92 (1,24,189.18 - 52,65,669) was not therefore, laid out or expended wholly and exclusively for the purpose of business profession and was, therefore, not an admissible expenditure leaving a provision only]. Thus there was escapement of taxable income for the assessment year 2007-08, and as such notice u/s.148 has been issued."
5.5 After such reasons were supplied to the petitioner which are similarly worded as the objection of audit party, he addressed a letter dated 08.10.2012 to the Deputy Commissioner of Income-tax, containing specifically that all these aspects have been duly examined and this is nothing but a change of opinion on the part of the Assessing Officer. It was also contended that the inquiry based on the report of the audit party cannot be the ground for reopening the assessment & entire issue for which reopening was done, was examined in scrutiny assessment by stating thus.
"[5] Sir, a sale is complete only when the delivery is made. The Assessee maintains the books of account of Mercantile basis and hence a contract is recorded when prices tend to move in either directions or real time basis. However, a sale remains incomplete when the goods are not delivered. And it is for this reason that an incomplete sale cannot contribute to the profit or loss for any period. It is equally true that accounting entries do not create an income or expenditure and Court have ruled in number of cases that Income Tax is not dependent on the accounting entries passed. Under the circumstances the sales recorded in our books does not give rise to any surplus or loss. However by way of abundant caution the assessee has balance a contractual sale (incomplete) by way of purchases MTM against these incomplete sales to ascertain true profit for the said previous year, had the transaction was completed at the year end at prices prevailing on last day of the previous year.
[6] Your Honor's observation that any provision in the books does not constitute expenditure and hence must be disallowed does not hold good ground. The proposal to tax the difference between provision for purchase in the beginning of the year and the provision at year end is mere hypothetical and has no legal or account base. The description "provision for purchase" is a nomenclature to describe purchases at MTM for all pending sale deals and cannot be treated at par with any accounting provision to meet any contingent future liability."
5.6 In the instant case, we deemed it appropriate to call for the record of the Assessing Officer for our perusal.
5.7 It could be noticed from the said record that the Assistant Commissioner of Income-tax had serious objections to the said report of audit party & vide his letter dated 23.03.2011 addressed to the Senior Audit Officer, he, in his communication, ventilated his objections in following fashion:
"2. The main contention of the Audit Party is that the assessee has debited an amount of Rs.1,24,31,189 towards the provision of purchase and out of this an amount of Rs.52,65,699 has been credited towards provisions for purchase reverse. The provisions for the expenses is not admissible expenditure.
3. The audit objection raised is not acceptable as it is contrary to the facts of the case. It may be mentioned that every expenditure related to business transaction is allowable in Income tax and when there is a determined and defined expenditure there is entry in the books of accounts. When such defined but indetermined expenditure in incurred, it referred to as provision. This provision is allowable as expenditure in Income Tax Act. Only un ascertained transactions when provided, are disallowed.
4. In the present case of the assessee is a dealer in securities, transactions of buying and selling are defined and determined. These are based on deals entered into at the relevant time. However, when sale-deal is entered into without holding the stock of the said script, these are settled by bought deal at a future date, either by delivery or settlement of difference in price prevailing on the date of settlement. In such cases, transactions are defined but purchase price is not determined till the date of settlement. It gets determined on the date of settlement.
5. When such a deal is entered into just prior to the date of annual closing day, i.e. before 31st March, actual profit or loss gets divided between two financial years. The same needs to be bifurcated based on the price prevailing on the last day of the financial year. Here, assessee made the entries in the books for short sale of securities and provided for purchase of those securities on the last day of Financial year at prices prevailing on that day. Thus correct profit or loss for this financial year can be ascertained. In the subsequent year, this provision for purchaser are reversed on the first day of the Financial year and when actual purchases are made, the net profit or loss relating to subsequent financial year is ascertained. Thus correct bifurcation of profit/loss between two financial years get ascertained and taxed in respective years.
6. The provision sought to be disallowed is not appropriation of profit or contingent expenditure or income of the assessee but a liquidated, ascertained and defined liability as creditors for purchases and purchase of stock is reflected in the books of accounts. This is basic and fundamental principle of accountancy and only method to ascertain correct profit or loss for any financial year.
7. Thus query raised by the audit party is based on the wrong understanding of accounting principles and failure to differentiate between business expenditure and personal expenditure. This provision has no personal nature of expenditure. It is pure and simple business expenditure for which liability is booked on provisional value till the actual event get crystalized."
5.8 It is thus clear from this communication that the Assessing Officer himself was convinced that audit party's query was raised on wrong understanding of accounting principles and on failure to differentiate between business expenditure and personal expenditure. The Assessing Officer also opined that as far as the personal expenditure was concerned that was pure and simple business expenditure on which liability was booked on provisional value till the actual event get crystalized.
5.9 It is a well laid down principle that the Assessing Officer requires to form his own belief at the time of reopening the assessment & while issuing notice of reopening. However, on having noticed certain aspects from the report of the audit party if the Assessing Officer chooses to form his opinion to reopen, validity of reopening of such assessment cannot be challenged on the ground of such reopening of assessment being at the instance of audit party.
5.10 On 01.04.1989, after the Amending Act, 1989, the powers of reopening assessment under Section 147 have been made very wide. What is predominantly questioned in this petition is the absence of exercise of powers given by the Statute under Section 147 by the Assessing Officer and his having reopened the assessment despite his own objection. The Assessing Officer needs to have reason to believe that income has escaped assessment for any assessment year. The term reason to believe provided in Section 147 of the Act would indicate that it is his own subjective satisfaction based on reasonable grounds.
5.11 This Court has also examined identical issue in yet another matter where other judgments of the Apex Court on the issue are also taken into account. It would be relevant to reproduce some of the relevant paragraphs from the case of Cadila Healthcare Ltd. v. Asstt. CIT [Special Civil Application No. 15566 of 2011, dated 14-12-2011], as under:
"Counsel vehemently contended that the entire issue has cropped up on the insistence of the Audit Party. He submitted that mere opinion of the audit party cannot form a basis for the Assessing Officer to believe that the income chargeable to tax has escaped assessment. In this regard, counsel relied on the following decisions :
(i) CIT v. Lucas T.V.S. Ltd., 249 ITR 306 in which the Apex Court upheld the the decision of the High Court in which the High Court had quashed the reopening proceedings wherein apart from the information furnished by the audit party, the Income Tax Officer had no other information for reopening the assessment.
(ii) Agricultural Produce Market Committee v. ITO ,[2011] 15 taxmann.com. 170 (Gujarat)wherein Division Bench of this Court was pleased to quash the notice for reopening where the only basis was the revenue audit objection as regards the eligibility of the assessee for exemption.
(iii) Adani Exports v. Deputy CIT, 240 ITR 224 wherein Division Bench of this Court held as under:
"It is true that satisfaction of the assessing officer for the purpose of reopening is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to be scrutinised. However, it is always open to question existence of such belief on the ground that what has been stated is not correct state of affairs existing on record. Undoubtedly, in the face of record, burden lies, and heavily lies, on the petitioner who challenges it. If the petitioner is able to demonstrate that in fact the assessing officer did not have any reason to believe or did not hold such belief in good faith or the belief which is projected in papers is not belief held by him in fact, the exercise of authority conferred on such person would be ultra vires the provisions of law and would be abuse of such authority. As the aforesaid decision of the Supreme Court indicates that though audit objection may serve as information, the basis of which the ITO can act, ultimate action must depend directly and solely on the formation of belief by the ITO on his own where such information passed on to him by the audit that income has escaped assessment. In the present case, by scrupulously analysing the audit objection in great detail, the assessing officer has demonstrably shown to have held the belief prior to the issuance of notice as well as after the issuance of notice that the original assessment was not erroneous and so far as he was concerned, he did not believe at any time that income has escaped assessment on account of erroneous computation of benefit u/s 80HHC. He has been consistent in his submission of his report to the superior officers. The mere fact that as a subordinate officer he added the suggestion that if his view is not accepted, remedial actions may be taken cannot be said to be belief held by him. He has no authority to surrender or abdicate his function to his superiors, nor the superiors can arrogate to themselves such authority. It needs hardly to be stated that in such circumstances conclusion is irresistible that the belief that income has escaped assessment was not held at all by the officer having jurisdiction to issue notice and recording under the office note on 8.2.97 that he has reason to believe is a mere pretence to give validity to the exercise of power. In other words, it was a colourable exercise of jurisdiction by the assessing officer by recording reasons for holding a belief which in fact demonstrably he did not held that income of assessee has escaped assessment due to erroneous computation of deduction u/s 80HHC, for the reasons stated by the audit. The reason is not far to seek."
On the other hand, learned counselShri Bhatt appearing for the Revenue opposed the petition contending that the petitioner had not made full and true disclosures in the return filed. Relying on the explanation to section 147, counsel submitted that mere indication that any tax was required to be deducted at source in the return would not absolve the assessee from disclosing other relevant aspects.
Counsel further submitted that the Assessing Officer, on the basis of what is pointed out by the audit party, can still form his own opinion with respect to escapement of income and merely because it was pointed out by the Audit party would not render his opinion invalid or the notice illegal. In this regard, counsel relied on the decision of CIT v. P.V.S. Beedies Pvt. Ltd., 237 ITR 13and in the case of Indian & Eastern Newspaper Society v. C.I.T. 119 ITR 996.
Having thus heard the learned counsel for the parties, we are not required to go into several contentions put forth by both sides. This is so, because on the available material on record, we are inclined to hold that the Assessing Officer could not have reopened the assessment by issuing the impugned notice.
The petitioner has been contending that the Assessing Officer had no independent reason to hold a belief that income chargeable to tax has escaped assessment. It is only at the insistence of the audit party that he had issued notice for reopening. In the petition, it is averred that "the issue on which the case of the petitioner has been reopened is based on the objection raised by the audit party. It is a matter of record that the Audit Party had raised an objection in regard to non deduction of tax under section 195 of the Income-tax Act, 1961 in respect of international transactions with associated enterprises in regard to payment for product registration services availed amounting to Rs.51,94,204/- and based on the same opined that the said expenditure was liable to be disallowed under section 40(1)(i) of the Act. The petitioner respectfully submits that since this objection had been raised on the basis of the information available on the assessment records of the petitioner's case for the A.Y. 2004-05, it clearly establishes that there was no default on the part of the petitioner in fully and truly disclosing the primary facts."
Since the specific case of the petitioner was that the Assessing Officer had acted at the behest of the Audit Party and held no independent opinion on its own with respect to the income escaping assessment, we had called for the original records pertaining to the files of the assessee from the Revenue Department. Learned counsel Shri Bhatt after detailed search, made available a copy of the letter dated 21.5.2009 from one Ritu Singh Sharma, Asstt. Commissioner of Income-tax, in charge of this case at the relevant time addressed to the Senior Audit Officer. In the said letter, she has stated that the audit party has observed that for the amount in question TDS was required to be deducted. Thereupon, details were called for. She concluded that looking to the Board's circular dated 8th August 1995, TDS was not required to be deducted. Taking note of the explanation of the assessee she stated as under:
"In view of the above explanation, there was no under assessment in the assessee company's case in both the assessment years i.e. A.Y.2004-05 & A.Y. 2005-06.
Further, basis requirement of deducting tax u/s.195 is that whether payment of sum to an non-resident is chargeable to tax under the provisions of the Act or not. TDS liability u/s.195 arises only when income is credited to account of payee or on actual payment of same.
Therefore, as the above mentioned expenditure is in the nature of reimbursement of expenses no TDS is required to be deducted in view of Board's circular No.715 dt. Aug 8, 1995."
Under the circumstances, it clearly emerges from the record that the Assessing Officer was of the opinion that no part of the income of the assessee has escaped assessment. In fact, after the audit party brought the relevant aspects to the notice of the AO, she held correspondence with the assessee. Taking into account the assessee's explanation regarding non-requirement of TDS collection and ultimately accepted the explanation concluding that in view of the Board's circular, tax was not required to be deducted at source. No income had therefore escaped assessment. Despite such opinion of the Assessing Officer, when ultimately the impugned notice came to be issued the only conclusion we can reach is that the Assessing Officer had acted at the behest of and on the insistence of the audit party. It is well settled that it is only the Assessing Officer whose opinion with respect to the income escaping assessment would be relevant for the purpose of reopening of closed assessment. It is, of course true, as held by the decisions of the Apex Court in the case of P.V.S. Beedies Pvt. Ltd. (supra) and Indian & Eastern Newspaper Society (supra), if the audit party brings certain aspects to the notice of the Assessing Officer and thereupon, the Assessing Officer forms his own belief, it may still be a valid basis for reopening assessment. However, in the other line of judgment noted by us, it has clearly been held that mere opinion of the Audit Party cannot form the basis for the Assessing Officer to reopen the closed assessment that too beyond four years from the end of relevant assessment year."
6. As is more than apparent, assessment was completed on scrutiny. In post assessment period, audit party raised the objection and Assessing Officer had strongly objected to such objections by communicating internally as mentioned hereinabove.
7. In such background, reasons for reopening if are noted, they are almost identically worded as that of audit report. No material worth the name emerges to indicate any independent application of mind. Facts are quite glaring on the contrary & they clearly establish absence of subjective satisfaction of Assessing Officer. Thus, the ground raised by the petitioner that such notice of reopening is invalid for the Assessing Officer having not formed his independent belief requires to be sustained.
8. As regards other two grounds raised by the petitioner which are also contested heavily, petitioner sought support from the decision of the Apex Court in GKN Driveshafts (India) Ltd. (supra) which makes it obligatory on the part of Assessing Officer to pass a reasoned order on receipt of objections from assessee before finalizing assessment and from CIT v. Kelvinator of India Ltd.[2010] 320 ITR 561 which does not permit change of opinion of Assessing Officer at the time of reopening of assessment. These aspects need not be gone into when the challenge of petitioner on the main ground itself has succeeded effectively.
Resultantly, the impugned notice of re-opening dated 21.11.2011 needs to be quashed. Petition is allowed and the same stands disposed of in the above terms. No order as to costs.
Accommodation entries from fake companies – Case Laws, Assessment Issues
When we refer to an entry of loan transaction as 'fake loan' received from a 'paper company', it invariably means that such entry represents unaccountedmoney of the person in whose books of account the money has been credited as loan and the lender company is only a conduit for routing the money back to the books of account of that person. However, despite having knowledge of this fact and knowing the techniques and methods used by the assessees for this purpose, it remains a huge challenge for the tax authorities to bring all material facts and evidences on record so as to prove which in his opinion is a fact beyond doubt.
2. In an economy where unaccounted income is a big menace, there are always efforts made by the tax evaders to bring their unaccounted income back to their books of account without paying any tax on the same. Numerous methods and techniques are used for this purpose and there are lots of techniques that authorities know about and probably countless others that have yet to be uncovered. Routing the unaccounted income back to the books of account disguised as loan or share capital is one of such methods widely used by the tax evaders in our country. The method is most prevalent and perhaps also one of the most organized one to bring the unaccounted money back to the books of account and even the established business houses resort to this method to bring their unaccounted money back to their business without paying any tax on the same.
The process to bring the money back in this manner is commonly known in business parlance asJamakharchi entries or accommodation entries. This is a well organized racket controlled and conducted by persons known as entry providers. Kolkata is undoubtedly the Mecca of such operations liberally providing entries to business concerns all over the country but other business hubs such as Mumbai and Delhi are also not far behind in having organized rackets for providingaccommodation entries to the willing tax evaders. Although, there is no uniformity of methodology or approach, or certainty of estimation of unaccounted income being brought back in the books of accounts in this manner, the magnitude of the same, without any doubt, is significant and huge.
2.1 The method of providing accommodation entry entails breaking up large amounts of money intosmaller, less-suspicious amounts. In India, this smaller amount has to be below Rs. 50,000/- as deposit of cash below this amount does not require providing PAN of the depositors. The money is then deposited into one or more bank accounts either by multiple people or by a single person over an extended period of time. Also, even larger amounts are deposited in the banks with PAN numbers of individuals who are mostly illiterate and work for these entry operators for small salary or commission. The money is then routed through paper companies controlled by these operators. These companies are incorporated by taking care of all formalities such as registering with ROC but having only postal addresses with no real office or employees. The directors of such companies are again individuals who are mostly illiterate or semiliterate and work for the entry operators for small salaries or commission. At first sight, most of these companies would pass of as finance, investment or technology companies. But as the entry operators would secretly admit, these are only paper companies used to route the unaccounted income and, at the same time, clean hoards of unaccounted income for their clients. These companies used for routing the unaccounted moneyare basically fake companies that exist for no other reason than to 'layer' the entries or pass it on to the beneficiary as loan or share capital. They take in unaccounted money as "loan or share capital" and pass it on to either another such paper company for 'layering' of the transaction or directly to the beneficiary as loan or share capital. They simply create the appearance of legitimate transactions through fake entries of loans or share capital in their books of account. As has been exposed from time to time through search and seizure operations by the department, such entry operators controls hundreds of bank accounts for depositing cash and hundreds of companies for routing the entries. Limited resource and infrastructure of the Registrar of Companies (ROC) perhaps makes it easier for them to incorporate large number of such paper companies without any difficulty. The process, prima facie, may appear very simple but it is extremely difficult to expose the whole chain of money deposited and 'layers' through which it is routed back to the beneficiary. The biggest problem is that there is no effective deterrence to curb the activities of these entry operators. Even conducting search and seizure operations against them have not really worked as a deterrence and such operations often ended up in disclosure of 'unaccounted commission income' of these entry operators which definitely could not be the purpose of conducting search and seizure operations against these operators.
2.2 In USA, in 1996, Harvard-educated economist Franklin Jurado went to prison for cleaning $36 million for Colombian drug lord Jose Santacruz-Londono. Even in India, people with a whole lot of unaccounted income typically hire such 'financial experts' to handle the process to bring the money back to books of account without paying tax on the same. It's complex by necessity. The whole idea is to make it impossible for Income-tax authorities to trace the unaccounted money and it's source during the process of bringing it back to the books of account of the assessee. However, we do not have such provisions in Income-tax Act 1961 to put such operators behind bars. Hence, the solution at the moment is to handle the individual cases of such entries routed back through paper companies at the time of assessment in the purview of available provisions of Income- tax Act and judicial pronouncements in respect of the same.
3. Recourse under Section 68 of the Income-tax Act 1961:
The recourse available for the assessing officers to tackle the individual cases of such fake loans brought back in the books of account as cash credit is within the meaning of Section 68 of the Income-tax Act 1961. The provision relating to cash credit, as in Section 68, was provided for the first time in the Income Tax Act 1961 (Act No.43 of 1961) as there was no corresponding provision in the Income Tax Act, 1922. It would be pertinent to note that Section 68 is a new section in comparisons with the provision of the Income Tax Act, 1922 and it is a culmination of a series of judicial pronouncements under the provisions of the Income Tax Act, 1922.
3.1 For the purpose of better comprehension, the Section 68 may be divided as below:
(1) Where any sum is found credited in the books of an assessee;
(2) Maintained for any previous year; and
(3) Assessee offers no explanation about the nature and source thereof; or
(4) The explanation offered by him, is not, in the opinion of the Assessing Officer, satisfactory;
(5) The sum so credited may be charged to Income tax;
(6) As the income of the assessee, of that previous year.
The initial catchphrase of the section is " Where any sum is found credited in the books of account of the assessee" meaning thereby that Section 68 is attracted where an entry relating to a sum is found to have been credited in the books of the assessee, which thus implies, existence of books and recording of a sum which the Assessing Officer considers as doubtful. Perusal of Section 68 would show that in relation to the expression 'books', the emphasis is on the word 'assessee'. In other words, such books have to be the books of the assessee himself and not of any other person and books of account of even a firm in which the assessee is a partner cannot be considered as the books of the assessee as held in the case of Smt. Shanta Devi v. CIT [1988] 171 ITR 532 (Punj. & Har.).
On this issue, it would also be pertinent to refer to another recent decision by Hon. Indore Benchof ITAT in case of Agrawal Coal Corpn. (P.) Ltd. v. Asstt. CIT 63 DTR 201. In this case it was held by the Tribunal that merely because the companies were registered with ROC, were filling return of income, having PANs/bank accounts, share application forms were submitted but the same did not establish their identity as these companies might have been existing on papers or in real sense at the time of registration but were specifically found to be non-existent. Further, assessee even failed to produce the director or employees of these share applicants and, thus, addition under Section 68 made in the hands of assessee was sustainable.
In CIT vs. Frostair (P.) Ltd. [2012] 26 taxmann. com 11 (Delhi), it was held that the assessee was under a burden to explain nature and source of share application money received in a given case and he had to establish shareholder's identity; genuineness of transaction; and creditworthiness of shareholders. On being informed that assessee had accepted share capital from some companies which were engaged in providing bogus entries, in form of loan and share application money, Assessing Officer asked for details under Section 142 of the Act. Assessee submitted a list of 18 shareholders from which Assessing Officer discerned that PAN/GIR No. of shareholders was not correct, they were not available at addresses given and they were not filing their ITRs with concerned officers. It was held by the Hon. High Court that since Assessing Officer had examined all facts in exhaustive manner, addition under Section 68 and, consequently initiation of penalty proceedings were justified.
Another recent decision by Hon. Allahabad High Court dated July 30, 2012 in the case of CITvs.Hindon Forge (P.) Ltd. [2012] 25 taxmann. com 239 (All.), may also be referred to on this issue. In this case the Assessee-company had taken unsecured loans from eight different trusts. One 'R' was common managing trustee of all these trusts. He was also managing director of assessee-company and other directors were his close relatives. 'R' did not produce trust deeds, its objects, and beneficiaries of trusts to establish that there were beneficiaries other than him and his associates. Trusts were receiving cash donations, which were transferred on same day to assessee by way of cheques. Assessee did not prove that trusts had any other sources of fund or that they had given credits to any other person or company. In the given facts it was held that the method and manner adopted by assessee clearly established that he was playing a fraud with revenue and, since genuineness of transactions were not established at all, there was no question of shifting burden under Section 68 on revenue and, therefore, addition of unsecured loans to income of assessee was justified. It is important to note that the decision of Hon. Gujarat High Court in the case of Dy. CIT v. Rohini Builders (supra) was also referred to in this decision.
There is another recent and significant decision dated 15th February 2012 in the case ofCommissioner of Income-tax vs. Nova Promoters & Finlease (P) Ltd. [2012] 18 taxmann.com217 (Delhi) which is of immense relevance, as in this case important observations have been made by the Hon. Delhi High Court as to the burden of proof and shifting of onus in the cases of cash credit under Section 68 of the Act. In this case, the assessee filed its return declaring loss for relevant assessment year which is Assessment Year 2000-01. Subsequently, Assessing Officer received information from the Investigation Wing that assessee had obtained accommodation entries in garb of share application monies. In order to examine genuineness and creditworthiness of companies which gave entries to the assessee, Assessing Officer issued summons to two persons namely, 'M' and 'R' who did not appear before him. Subsequently, assessee filed a letter with Assessing Officer along with affidavits of 'M' and 'R' in which both of them had stated that transactions with assessee were genuine and earlier statements recorded from them by the Investigation Wing were given under pressure. The Assessing Officer, however, did not accept those affidavits and made certain additions to the income of the assessee under Section 68. But, Hon.Tribunal, taking a view that there was no dispute about identity of shareholders namely 'M' and 'R', deleted addition made by the Assessing Officer. On revenue's appeal, it was noted by the Hon. High Court that both 'M' and 'R' had admitted before Additional Director (Investigation) that they were acting as accommodation entry providers. They had also given a list of 22 companies in which they were operating accounts. It was also apparent that out of 22 companies whose names figured in information given by them to the Investigation Wing, 15 companies had provided so-called 'share subscription monies' to the assessee. It was held by the Hon. High Court that on facts, there was specific involvement of assessee-company in modus operandi followed by 'M' and 'R' and, therefore, impugned order passed by Tribunal deleting addition was to be set aside. It was held by the Hon. High Court that "the ratio of a decision is to be understood and appreciated in the background of the facts of that case. So understood, it will be seen that where the complete particulars of the share applicants such as their names and addresses, income tax file numbers, their creditworthiness, share application forms and share holders' register, share transfer register etc. are furnished to the Assessing Officer and the Assessing Officer has not conducted any enquiry into the same or has no material in his possession to show that those particulars are false and cannot be acted upon, then no addition can be made in the hands of the company under Section 68 and the remedy open to the revenue is to go after the share applicants in accordance with law. We are afraid that we cannot apply the ratio to a case, such as the present one, where the Assessing Officer is in possession of material that discredits and impeaches the particulars furnished by the assessee and also establishes the link between self-confessed "accommodation entry providers", whose business it is to help assessees bring into their books of account their unaccounted monies through the medium of share subscription, and the assessee. The ratio is inapplicable to a case, again such as the present one, where the involvement of the assessee in such modus operandi is clearly indicated by valid material made available to the Assessing Officer as a result of investigations carried out by the revenue authorities into the activities of such "entry providers". The existence with the Assessing Officer of material showing that the share subscriptions were collected as part of a pre-meditated plan – a smokescreen – conceived and executed with the connivance or involvement of the assessee excludes the applicability of the ratio. In our understanding, theratio is attracted to a case where it is a simple question of whether the assessee has discharged the burden placed upon him under Section 68 to prove and establish the identity and creditworthiness of the share applicant and the genuineness of the transaction. In such a case, theAssessing 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.
Reference was also made on behalf of the assessee to the recent judgment of a Division Bench of this court in CIT v. Oasis Hospitalities Private Limited, (2011) 333 ITR 119. We have given utmost consideration to the judgment. It disposes of several appeals in the case of different assessees. These quoted observations clearly distinguish the present case from CIT v Oasis Hospitalities P Ltd. (supra). Except for discussing the modus operandi of the entry operators generally, the Assessing Officer in that case had not shown whether any link between them and the assessee existed. No enquiry had been made in this regard. Further, the assessee had not been confronted with the material collected by the investigation wing or was given an opportunity to cross examine the persons whose statements were recorded by the investigation wing.
In the case before us, not only did the material before the Assessing Officer show the link betweenthe entry providers and the assessee-company, but the Assessing Officer had also provided thestatements of Mukesh Gupta and Rajan Jassal to the assessee in compliance with the rules ofnatural justice. Out of the 22 companies whose names figured in the information given by them tothe investigation wing, 15 companies had provided the so-called "share subscription monies" to theassessee.
In the light of the above discussion, we are unable to uphold the order of the Tribunal confirming the deletion of the addition of Rs.1,18,50,000 made under Section 68 of the Act as well as the consequential addition of Rs.2,96,250."
Another decision of Hon. Delhi High Court, which is most recent dated 21st December 2012 in the case of CIT vs. N R Portfolios Pvt. Ltd. in ITA Nos. 134/2012 could be of utmost help for the assessing officers dealing with the challenges of exposing accommodation entries and bringing it to tax under Section 68 of the Act. In this case, the assessee, a company, received Rs. 35 lakhs towards share allotment. As the shareholders did not respond to summons, the AO assessed the said sum as an unexplained credit under Section 68. On appeal, the CIT(A) and Tribunal relied onLovely Exports 216 CTR 195 (Del) & Divine Leasing 299 ITR 268 (SC), held that as the assessee had furnished the PAN, bank details and other particulars of the share applicants, it had discharged the onus of proving the identity and credit-worthiness of the investors and that the transactions were not bogus. It was also held that the AO ought to have made enquiries to establish that the investors had given accommodation entries to the assessee and that the money received from them was the assessee's own undisclosed income. On appeal by the department the Hon. High Court, held reversing the decision of Ld.CIT(A) & Hon. Tribunal that:
Though in previous decisions (Lovely Exports) it was held that the assessee cannot be faulted if the share applicants do not respond to summons and that the Revenue authorities have the wherewithal to compel anyone to attend legal proceedings, this is merely one aspect. An assessee's duty to establish the source of the funds does not cease by merely furnishing the names, addresses and PAN particulars, or relying on entries in the Registrar of Companies webs ite. The company is usually a private one and the share applicants are known to it since the shares are issued on private placement basis. If the assessee has access to the share applicant's PAN or bank account statement, the relationship is closer than arm's length. Its request to such concerns to participate in income tax proceedings, would, from a pragmatic perspective, be quite strong. Also, the concept of "shifting onus" does not mean that once certain facts are provided, the assessee's duties are over. If on verification, the AO cannot contact the share applicants, or the information becomes unverifiable, the onus shifts back to the assessee. At that stage, if it falters, the consequence may well be an addition under
Section 68 (A. Govindarajulu Mudaliar 34 ITR 807 followed).
Another decision of utmost relevance is of Hon. ITAT Indore Bench in the case of Vaibhav Cotton(P.) Ltd. vs. Income-tax Officer, 4(4) Indore, [2012] 26 taxmann.com 352 (Indore.) In this case the assessee company had shown in its balance sheet certain amount representing share capital received from a Kolkata based company and some other individual investors. Face value of shares was Rs. 10 and those shares were issued at a premium of Rs. 90 per share. Next year, promoters/directors of assessee-company purchased those shares back at a discount of 90 per cent. In order to ascertain genuineness of share transactions, Assessing Officer issued notices to Kolkata based company and other alleged shareholders which were returned by postal authorities with a remark 'left'. He also visited respective banks through which money was routed by these investors and found that cash was deposited immediately prior to issue of cheque to assessee and accounts of those companies were closed immediately after transfer of funds. Assessing Officer thus taking a view that share transactions were not genuine, added amount in question to assessee's taxable which was upheld by the Hon. Tribunal.
4. It is not necessary to establish that the money came back to the books of the assessee as 'entry' actually emanated from his coffers :
While dealing with doubtful cash credits, is it necessary for the assessing officer to establish that the money came back to the books of the assessee as 'entry' actually emanated from the coffers of the assessee? This issue has been decided by the Hon'ble Delhi High Court in a recent decision dated 20.07.2012 in the case of Commissioner of Income-tax vs Independent Media (P.) Ltd.210 TAXMANN 14(Delhi)(2012), which is significant as the observation made by the Hon. Court in this decision would be a great help in establishing the cases where 'entries' have been taken from paper companies. In this case it was alleged by the Investigation wing that the assessee-company received share capital from those persons who had given statements before Investigation wing that they were entry providers giving accommodation entries after receiving cash and after charging their commission. Assessee furnished PAN of subscriber-companies, share application forms, board resolutions, copy of bank statement, pay orders, confirmation from subscribers, their income-tax returns, copies of their balance sheets, etc. However it was held by the Hon. Court that if explanation adduced by assessee with regard to identity and creditworthiness of subscriber-companies and genuineness of transactions was not acceptable for valid reasons, Assessing Officer could make addition under Section 68 and for that purpose he would not be under any duty to further show or establish that monies emanated from coffers of assessee-company. The Hon. Court further observed that "We are unable to uphold the view of the Tribunal that it is incumbent upon the Assessing Officer, on the facts and circumstances of the case, to establish with the help of material on record that the share monies had come or emanated from the assessee's coffers. Section 68 of the Act casts no such burden upon the Assessing Officer. This aspect has been considered more than 50 years back by the Supreme Court in the case of A Govindarajulu Mudaliar v.CIT [1958] 34 ITR 807 where precisely the same argument was advanced before the Supreme Court on behalf of assessee. The argument was rejected by the Court."
4.1 The Hon'ble Court further referred that in the above case, Shri Venkatarama Iyer, J. speaking for the Court observed as under: -
"Now the contention of the appellant is that assuming that he had failed to establish the case put forward by him, it does not follow as a matter of law that the amounts in question were income received or accrued during the previous year, that it was the duty of the Department to adduce evidence to show from what source the income was derived and why it should be treated as concealed income. In the absence of such evidence, it is argued, the finding is erroneous. We are unable to agree. Whether a receipt is to be treated as income or not, must depend very largely on the facts and circumstances of each case. In the present case the receipts are shown in the account books of a firm of which the appellant and Govindaswamy Mudaliar were partners. When he was called upon to give explanation he put forward two explanations, one being a gift of Rs. 80,000/- and the other being receipt of Rs. 42,000/- from business of which he claimed to be the real owner. When both these explanations were rejected, as they have been it was clearly upon to the Income-tax Officer to hold that the income must be concealed income. There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipt are of an assessable nature. The conclusion to which the Appellate Tribunal came appears to us to be amply warranted by the facts of the case. There is no ground for interfering with that finding, and these appeals are accordingly dismissed with costs."
5. Responsibility towards source of source :
In ordinary circumstances, assessee's burden is confined to prove creditworthiness of creditor with reference to transaction between assessee and creditor. It was so held in Nemi Chand Kothari v. CIT [2004] 136 Taxman 213 (Gau.),that a harmonious construction of Section 106 of the Evidence Act and Section 68 of the Income-tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been, eventually, received by the assessee. It is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transaction, which took place between the creditor and sub-creditor and/or creditworthiness of the sub-creditors, since, these aspects may not be within the special knowledge of the assessee.
5.1 However, on this issue, it is important to keep in mind that it may not be the responsibility of the assessee to prove source of source but nothing precludes the assessing officer to make enquiry in respect of the source of the source as well to establish that both the source and it's source are part of a larger chain of 'paper companies' engaged in the business of providing accommodation entries to the willing tax evaders. Once a valid presumption is raised by way of an enquiry about the genuineness of transaction between the source and it's source the same could be used as an evidence to doubt the integrity of the source of the assessee and to raise a valid presumption about the transaction between the assessee and it's source being not genuine.
6. Test of human probability :
As has been discussed earlier, the issue of shifting of onus in the cases of cash credit is a complex one and each case has to be examined in it's own facts and circumstances. Hence, in the cases of 'fake loan' from 'paper companies' the theory of preponderance of human probability as pronounced by the Hon. Apex Court in the cases of CIT v. Durga Prasad More [1971] 82 ITR 540 and Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801 (SC) is of utmost importance. In the cases where it has been established that the source company is a mere 'paper company' solely engaged in the activity of providing accommodation entries, the presumption on the basis of human probability may be referred to by the assessing officers to fortify their findings.
6.1 Hon. Supreme Court in CIT v. Durga Prasad More [1971] 82 ITR 540 , at pages 545-547 made a reference to the test of human probabilities in the following fact situation : –
"… Now we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide-open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.
Now, coming to the question of onus, the law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some cases, the onus may be heavy whereas, in others, it may be nominal. There is nothing rigid about it. Herein the assessee was receiving some income. He says that it is not his income but his wife's income. His wife is supposed to have had two lakhs of rupees neither deposited in banks nor advanced to others but safely kept in her father's safe. Assessee is unable to say from what source she built-up that amount. Two lakhs before the year 1940 was undoubtedly a big sum. It was said that the said amount was just left in the hands of the father-in-law of the assessee. The Tribunal disbelieved the story, which is, prima facie, a fantastic story. It is a story that does not accord with human probabilities. It is strange that the High Court found fault with the Tribunal for not swallowing that story. If that story is found to be unbelievable as the Tribunal has found, and in our opinion rightly, then the position remains that the consideration for the sale proceeded from the assessee and, therefore, it must be assumed to be his money.
It is surprising that the High Court has found fault with the Income-tax Officer for not examining the wife and the father-in-law of the assessee for proving the department's case. All that we can say is that the High Court has ignored the facts of life. It is unfortunate that the High Court has taken a superficial view of the onus that lay on the department.
'…Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But, in that sphere, the decision of the final fact-finding authority is made conclusive by law." (p. 545)
6.2 The test of human probabilities has been emphasized in yet another decision of the Hon. Supreme Court in the case of Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801 (SC). It was held in this case that in view of Section 68, 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 the 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 case there isprima facie evidence against the assessee, viz., the receipt of money, and if he fails to rebut the same, the said evidence being unrebutted can be used against him by holding that it is a receipt of an income nature. While considering the explanation of the assessee, the department cannot, however, act unreasonable.
6.3 Why this decision is so important while dealing with cases of 'fake loan' from 'paper companies', because it acknowledges that what is apparent may not be real and test of human probabilities has to be applied to understand if the apparent is real and if the transaction fails to withstand the test of human probabilities it has to be taken as an in-genuine transaction even if documentary evidences suggest otherwise. In this case, the assessee, a dealer in art pieces, had shown income from horse-race winnings in two consecutive accounting years. The assessing officer did not accept this and made addition under Section 68 which was confirmed by the Appellate Assistant Commissioner. Thereafter the assessee approached the Settlement Commission. The Settlement Commission also took the view that the claim of winnings in races was false and what were passed off as such winnings really represented the appellants taxable income from some undisclosed sources. Hon. Supreme Court also agreed with the Settlement Commission saying that after considering the surrounding circumstances and applying the test of human probabilities the Commission had rightly concluded that the assessee's claim about the amount being her winnings from races was not genuine.
6.4 The test of human probability often comes to the help of the revenue to track unaccounted income. This could be a great help in exposing the 'fake loans' from 'paper companies' as well. In one of its special kinds, the test of human probability made an assessee pay huge amount of tax inSom Nath Maini v. CIT [2008] 306 ITR 414 (Punj. & Har.). In this case, the assessee in his return declared loss from sale of gold jewellery and also declared a short-term capital gain from sale of shares so that the two almost match each other. This simple tax planning became ineffective after the Assessing Officer disbelieved the astronomical share price increase applying the test of human probability. The Assessing Officer observed that short-term capital gains were not genuine in as much as the assessee had purchased 45000 shares of Ankur International Ltd. at varying rates from Rs. 2.06 to Rs. 3.1 per share and sold them within a short span of six-seven months at the rate varying from Rs. 47.75 paisa to Rs. 55. Even though the two respective transactions for purchase and sale of shares were routed through two different brokers, yet the Assessing Officer did not believe the astronomical rise in share price of a company from Rs. 3 to Rs. 55 in a short-term.The assessee lost its case before the Tribunal. Confirming the order of the Tribunal, the Punjab and Haryana High Court held that the burden of proving that income is subject to tax is on the revenue but, on the facts, to show that the transaction is genuine, burden is primarily on the assessee. As per the Court, the Assessing Officer is to apply the test of human probabilities for deciding genuineness or otherwise of a particular transaction. Mere leading of the evidence that the transaction was genuine, cannot be conclusive. Any such evidence is required to be assessed by the Assessing Officer in a reasonable way. Genuineness of the transaction can be rejected in case the assessee leads evidence which is not trustworthy, and the department does not lead any evidence on such an issue.
7. Responsibility of the Assessing Officer :
There is no denying to the fact that in the case of cash credit the primary onus is on the assessee and where the assessee fails to discharge such onus the Assessing Officer is well within his jurisdiction to treat the cash credit as income of the assessee within the meaning of Section 68 of the Act. However, the balance of burden in the case of cash credits is delicate and complex and unless and until the Assessing Officer shows his intention to make enquiry to examine the truth, the additions made under Section 68 in the cases of 'fake loan' from 'paper companies' would not get affirmation of the appellate authorities. In the cases of loans from 'paper companies', additions are often made by the Assessing Officers by highlighting the defects in the submission of the assessee without making further enquiries which does not help the case of revenue as merely highlighting defects in the submission of the assessee without making any further enquiry would in most cases be not accepted as sufficient to reach a conclusion that entry of such loan represents income of the assessee.
Some example of the same is given below for illustration:
1. The assessee has provided name, address and PAN of the creditor but did not provide confirmations from him.
2. Confirmatory letters from the creditors were filed but the creditors were not produced for examination.
3. Summons issued under Section 131 to the creditors but they did not respond to the summons.
4. The letters sent to the creditors at the given address returned unserved with comment "not found" or "inadequate address".
5. The confirmation of the creditor was filed but his bank statement was not produced or his credit worthiness have not been established.
7.1 It must be kept in mind that such instances could be the circumstances to have a valid doubt as to the genuineness of the loan but these alone would not be sufficient to have a valid presumption as to the fact that the cash credit represents income of the assessee. Under Section 68 of the Act, the Assessing Officer has jurisdiction to make enquiries with regard to the nature and source of the sums credited in the books of account of the assessee and it is immaterial as to whether the amount so credited is given the colour of a loan or share application money or sale proceeds. The use of the words "any sum credited in the books" in Section 68 indicates that the section is very widely worded and the Assessing Officer is not precluded from making an enquiry as to the true nature and source of the sum credited in the accounts even if it is credited as loan from another company. The Assessing Officer would be entitled, and it would indeed be his duty to enquire whether the alleged creditors do in fact exist or not and whether the loan shown in the garb of a credit from a company is nothing but an accommodation entry routed through a paper companysolely existing for the purpose of providing such accommodation entries. Although, given in the context of share application money, the decision of Hon. Delhi High Court in the case of CIT vs. Sofia Finance Ltd. 205 ITR 98 (full bench) is extremely significant where explaining and rather over ruling some observations of the division bench in Steller Investment case which has been confirmed by the Hon. Supreme Court in 164 CTR 287 in a one line decision stating that no question of law arose in such a case. The full bench observed as under :
"what is clear, however, is that Section 68 clearly permits an ITO to make enquires with regard to the nature and source of any of all the sums credited in the books of account of the company irrespective of the name and cloture or the source indicated by the assessee. In other words, the truthfulness of the assertion of the assessee regarding the nature and the source of the credit in his books of account can be gone into by the ITO. In the case of Steller Investments Ltd., the ITO had accepted the entries subscribed share capital. Section 68 of the Act was not referred to and the observations in the said judgement cannot mean that the ITO cannot or should not go into the position as to whether the alleged share holder actually existed or not. If share holders 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 regard as capital receipts and to that extent the observations in the case of Steller Investment Ltd. are correct, but if, on the other hand, the assessee offers new explanation at all or explanation offered is not satisfactory then, the provision of Section 68 may be invoked."
7.2 It is, therefore, imperative on the part of the Assessing Officer to make enquires as to the nature and source of cash credits and bring evidence on record to expose the fact that the loan is a fake one representing an accommodation entry from a paper company. Although, the nature and extent of enquiry has to be case- specific so as to raise a valid presumption to treat the loan as income of the assessee. However, in the case of accommodation entries received through paper companies the Assessing Officer can easily bring certain facts on record to highlight that the loan received actually represents an accommodation entry. It could be proved that the company providing loan exists only on paper, it has no employees, the address given is only a postal address and the company does not have any physical set up at the given address, the same address is used as postal address for multiple companies indulging in to the same activity of providing accommodation entries. It could also possibly be proved that the directors of the companies are non- existent or even if they exist, they are illiterate or semi illiterate individuals who do not have competence or credibility to operate any investment company. Examining the directors on oath under Section 131 could also be a way to carry the enquiry further so as to prove that they may be acting on behalf of some other person for petty amounts received as salary or commission. It could also be proved that the company is receiving huge amount as loan and giving the same to other concerns without any apparent motive of conducting any actual business and the directors of the company are not even aware of such huge transactions made by the company for, considering the doctrine of business purposes, the company should have a reason, other than avoidance of taxes, for undertaking such transactions. Necessary enquiries may also be made from the bank to examine the bank account of the creditor and also to examine the person who has introduced such bank accounts. In some of the cases, It may have been held that the assessee do not have responsibilities to prove the source of the source, but nothing precludes the Assessing Officer to examine even the source of the source as a process of enquiry to bring the truth on record that these companies work in a chain as conduit to provide accommodation entries which does not represent any genuine transactions.
7.3 As discussed earlier, in number of decisions the efforts of the Assessing Officers have been acknowledged and applauded by the appellate authorities where enquires have been made and additional information and evidences have been brought on record to raise a valid presumption as to the cash credit being income of the assessee. It is, therefore, required that the Assessing Officers properly analyse the individual cases before them and, instead of solely depending on the submissions of the assessee and highlighting the deficiency of the same, conduct independent enquiry and bring additional facts and evidences on record to raise a valid presumption, in favour ofaccommodation entry representing income of the assessee, which could sustain the test of appea
Author
Sunil Kumar Jha
Addl. Commissioner of Income Tax, Central Range, Baroda
-- Sunil Kumar Jha
Addl. Commissioner of Income Tax, Central Range, Baroda
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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