When we refer to an entry of loan transaction as `fake loan' received from a `paper company', it invariably means that such entry represents unaccounted money 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 as Jamakharchi 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 providing accommodation 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 into smaller, 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 money are 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 Bench of 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 CIT vs.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 of Commissioner of Income-tax vs. Nova Promoters & Finlease (P) Ltd. [2012] 18 taxmann.com 217 (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, the ratio is attracted to a case where it is a simple question of whether the assessee has discharged the burden placed upon him under Section 68 to prove and establish the identity and creditworthiness of the share applicant and the genuineness of the transaction. In such a case, the Assessing Officer cannot sit back with folded hands till the assessee exhausts all the evidence or material in his possession and then come forward to merely reject the same, without carrying out any verification or enquiry into the material placed before him. The case before us does not fall under this category and it would be a travesty of truth and justice to express a view to the contrary.
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 between the entry providers and the assessee-company, but the Assessing Officer had also provided the statements of Mukesh Gupta and Rajan Jassal to the assessee in compliance with the rules of natural justice. Out of the 22 companies whose names figured in the information given by them to the investigation wing, 15 companies had provided the so-called "share subscription monies" to the assessee.
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 on Lovely 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 underSection 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 is prima 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 in Som 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 company solely 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 of accommodation entry representing income of the assessee, which could sustain the test of appeal.
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Author
Sunil Kumar Jha
Addl. Commissioner of Income Tax, Central Range, Baroda
Author
Sunil Kumar Jha
Addl. Commissioner of Income Tax, Central Range, Baroda
Whether when dividend income is incidental to business of sale of shares, which remained unsold, it cannot be said that expenditure incurred in acquiring shares is to be apportioned to extent of dividend income and should be disallowed - NO: Karnataka HC
BANGALORE, APRIL 11, 2012: THE issues before the Bench are - Whether when dividend income is incidental to the business of sale of shares, which remained unsold with the assessee, it cannot be said that expenditure incurred in acquiring shares is to be apportioned to the extent of dividend income and should be disallowed and Whether when the assessee takes loan and purchases shares and earns dividend income on unsold shares, any notional interest expenditure is to be disallowed. And the answer goes in favour of the assessee.
Facts of the case
Assessee is a distributor of state lotteries and a dealer in shares and securities. The assessee earned dividend income of Rs.46,67,190/- from shares of certain companies and 93% of shares of M/s Kurlon Ltd., and further the assessee has purchased 24,000 fully paid shares from M/s.Kurlon Ltd., and converted its stock of partly paid shares into fully paid shares by paying the outstanding amount of Rs.8/- per share, which worked out to Rs.5,27,97,016/-. To pay for the conversion cost, the assessee had entered into agreement with M/s.Kitchen Appliances Pvt. Ltd., to avail interest free loan of Rs.14/-crores and had paid Rs.28/- lakhs to one Sri.A.S.Krishna Iyer for brokering this loan. The Assessing Officer held that this expenditure was directly attributable to the earning of the dividend income and disallowed the same. He further considered the business expenditure claimed by the assessee and estimated the expenditure incurred by the assessee on earning of the dividend income at Rs.27,24,330/- under Rule 8D of the Income Tax Rules and disallowed the same as relatable to earning of the exempt income.
The Commissioner of Income (Appeals) confirmed the said order. In appeal, the Tribunal was of the view that the assessee had taken interest free loan from M/s.Kitchen Appliances Pvt. Ltd,, and what was disallowed, was the expenditure relatable to the broking of this loan as the expenditure for earning of dividend income from these shares. It was not only the direct expenditure, which was disallowable under Section 14A in relation to exempt income, but even indirect expenditure was to be disallowed proportionately. The expenditure, which was relatable to earning of dividend income though incidental to the trading of shares, was also to be disallowed under Section 14A of the Income Tax Act. However, the Tribunal found that the Assessing Officer attributed the entire broking commission as relatable to earning of dividend income only, which was not correct. The loan had been utilized for the purchase of shares and the profit earned by sale of these shares was offered as business income. Hence, the broking expenditure had to be considered as business expenditure, as well and allowed the appeal accordingly. The Assessing Officer was directed to bifurcate all the expenditure proportionally and allow the expenditure in accordance with law.
On appeal to the HC, the Counsel for the assessee contended that the assessee had incurred expenditure for purchasing shares. 63% of the shares so purchased were sold and the income derived therefrom was offered to tax as business income. The remaining 37% of the shares remained unsold. Those shares yielded dividend. The assessee had not incurred any expenditure to. earn the said dividend income. Therefore, no expenditure could be attributed to the said dividend income and the said expenditure cannot be disallowed and the assessee was entitled to the benefit of deduction of the entire expenditure incurred in respect of purchase of shares.
Per contra, the Counsel for the Revenue pointed out that admittedly when shares retained by the assessee had yielded dividend, when the dividend income was exempted from payment of income tax proportionately, the expenditure incurred in acquiring that dividend also should be excluded from expenditure. In that view of the matter, the orders passed by the authorities are legal and valid.
Held that,
++ when no expenditure is incurred by the assessee, in earning the dividend income no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares are retained. It has remained unsold with the assessee. It is those unsold shares which have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions;
++ in that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside.
BANGALORE, APRIL 11, 2012: THE issues before the Bench are - Whether when dividend income is incidental to the business of sale of shares, which remained unsold with the assessee, it cannot be said that expenditure incurred in acquiring shares is to be apportioned to the extent of dividend income and should be disallowed and Whether when the assessee takes loan and purchases shares and earns dividend income on unsold shares, any notional interest expenditure is to be disallowed. And the answer goes in favour of the assessee.
Facts of the case
Assessee is a distributor of state lotteries and a dealer in shares and securities. The assessee earned dividend income of Rs.46,67,190/- from shares of certain companies and 93% of shares of M/s Kurlon Ltd., and further the assessee has purchased 24,000 fully paid shares from M/s.Kurlon Ltd., and converted its stock of partly paid shares into fully paid shares by paying the outstanding amount of Rs.8/- per share, which worked out to Rs.5,27,97,016/-. To pay for the conversion cost, the assessee had entered into agreement with M/s.Kitchen Appliances Pvt. Ltd., to avail interest free loan of Rs.14/-crores and had paid Rs.28/- lakhs to one Sri.A.S.Krishna Iyer for brokering this loan. The Assessing Officer held that this expenditure was directly attributable to the earning of the dividend income and disallowed the same. He further considered the business expenditure claimed by the assessee and estimated the expenditure incurred by the assessee on earning of the dividend income at Rs.27,24,330/- under Rule 8D of the Income Tax Rules and disallowed the same as relatable to earning of the exempt income.
The Commissioner of Income (Appeals) confirmed the said order. In appeal, the Tribunal was of the view that the assessee had taken interest free loan from M/s.Kitchen Appliances Pvt. Ltd,, and what was disallowed, was the expenditure relatable to the broking of this loan as the expenditure for earning of dividend income from these shares. It was not only the direct expenditure, which was disallowable under Section 14A in relation to exempt income, but even indirect expenditure was to be disallowed proportionately. The expenditure, which was relatable to earning of dividend income though incidental to the trading of shares, was also to be disallowed under Section 14A of the Income Tax Act. However, the Tribunal found that the Assessing Officer attributed the entire broking commission as relatable to earning of dividend income only, which was not correct. The loan had been utilized for the purchase of shares and the profit earned by sale of these shares was offered as business income. Hence, the broking expenditure had to be considered as business expenditure, as well and allowed the appeal accordingly. The Assessing Officer was directed to bifurcate all the expenditure proportionally and allow the expenditure in accordance with law.
On appeal to the HC, the Counsel for the assessee contended that the assessee had incurred expenditure for purchasing shares. 63% of the shares so purchased were sold and the income derived therefrom was offered to tax as business income. The remaining 37% of the shares remained unsold. Those shares yielded dividend. The assessee had not incurred any expenditure to. earn the said dividend income. Therefore, no expenditure could be attributed to the said dividend income and the said expenditure cannot be disallowed and the assessee was entitled to the benefit of deduction of the entire expenditure incurred in respect of purchase of shares.
Per contra, the Counsel for the Revenue pointed out that admittedly when shares retained by the assessee had yielded dividend, when the dividend income was exempted from payment of income tax proportionately, the expenditure incurred in acquiring that dividend also should be excluded from expenditure. In that view of the matter, the orders passed by the authorities are legal and valid.
Held that,
++ when no expenditure is incurred by the assessee, in earning the dividend income no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares are retained. It has remained unsold with the assessee. It is those unsold shares which have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions;
++ in that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside.
| | Assessee is not responsible for wrong certificate issued by other party |
| Posted on 25 July 2013 by Diganta Paul | |
CourtINCOME TAX APPELLATE TRIBUNAL BriefThe Ld. CIT(A) has erred on facts and in law and on facts in deleting addition of Rs. 1,93,660/- on account of difference in cash deposit in bank account and cash sales, ignoring the cash deposits in bank account exceeded cash sales and the assessee offered no explanation for the same during the course of assessing proceedings CitationIncome-tax Officer, Ward-3(2), New Delhi. PAN: AABCC7720P (Appellant) Vs. M/s CNR Leading Softek (P) Ltd., 26/1, Gali No. 13, Shahdara, Delhi. (Respondent) Judgement IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH "B" New Delhi) BEFORE SHRI R. P. TOLANI: JUDICIAL MEMBER And SHRI B.C. MEENA: ACCOUNTANT MEMBER ITA No.3402 /Del/ 2010 (Assessment Year: 2005-06) Income-tax Officer, Ward-3(2), New Delhi. PAN: AABCC7720P (Appellant) Vs. M/s CNR Leading Softek (P) Ltd., 26/1, Gali No. 13, Shahdara, Delhi. (Respondent) Appellant By: Ms. Archana S. Awasthi Sr. DR Respondent By: Shri Raj Kumar CA & Sh. Sumit Goel CA ORDER PER R. P. TOLANI, J.M: This is revenue's appeal against CIT(A)'s order dated 29-4-2010 relating to assessment year 2005-06. Following grounds are raised: "1) The Ld. CIT(A) has erred on facts and in law and on facts in deleting addition of Rs. 1,93,660/- on account of difference in cash deposit in bank account and cash sales, ignoring the cash deposits in bank account exceeded cash sales and the assessee offered no explanation for the same during the course of assessing proceedings. 2. The Ld. CIT(A) has erred on facts and in law and on facts in deleting addition of Rs. 4,48,000/- (actual figure Rs. 4,80,000/-) on account of unexplained share application money, ignoring that the assessee failed to prove the sources of the same during the course of assessment proceedings. 3. The Ld. CIT(A) has erred on facts and in law and on facts in deleting addition of Rs. 6,00,000/- on account of credits from M/s Integra Telecommunication & Software Ltd. (ITSL), ignoring that the copy of account of the assessee in the books of account of ITSL does not match with the confirmation filed by the assessee. 4. The Ld. CIT(A) has erred on facts and in law and on facts in deleting addition of Rs. 73,000/- on account of interest accrued but not declared as income, ignoring that the assessee failed to submit any reply during the course of assessment proceedings on a specific show cause on this issue. 5. The Ld. CIT(A) has erred on facts and in law and on facts in deleting addition of Rs. 4,76,000/- on account of amount received from M/s Global Info System Ltd. for the sale of non-existing fixed assets, ignoring that the assessee failed to submit any reply during the course of assessment proceedings on the specific show cause on this issue. 6. The Ld. CIT(A) has erred on facts and in law and on facts in deleting addition of Rs. 4,06,000/- on account of unexplained cash credits received from M/s Global Info System Ltd., ignoring that the assessee failed to submit any reply during the course of assessment proceedings on the specific show cause on this issue. 7. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." 2. Ld. DR relied on the order of assessing officer and contends that the assessee did not produce sufficient documents before the assessing officer. Though the assessing officer gave the assessee adequate opportunities to file necessary documents, the assessee did not avail the same and the additions were made by assessing officer. CIT(A) admitted the additional evidence and rightly called for the remand report from the assessing officer. The assessing officer pointed out that necessary hearings were granted to the assessee and objected to admission of additional evidence. Assessing officer ought to have been given one more opportunity to comment on the merits of the additional evidence. Thus, the order of assessing officer is relied on and it is pleaded that CIT(A) gave the relief without proper justification. Alternatively it is urged that matter may be set aside to assessing officer. 3. Ld. counsel for the assessee on the other hand contends that revenue has not raised any ground challenging the admission of additional evidence by CIT(A). Besides additional evidence was sent by CIT(A) to the assessing officer to examine the same and submit his comments thereon in the remand report. Assessing officer however chose not to offer comments for which assessee should not be penalized to face another round of proceedings. Therefore, no justification in issues being raised by revenue in this behalf or to set aside the matter. 3.1. Apropos the first ground of the revenue it is pleaded that the assessee maintains regular books of account and all the deposits in the bank and withdrawals from the bank are duly incorporated in the books. Assessing officer on suspicion made the addition holding that the total cash deposits in the bank were to the tune of Rs. 12,12,160/- as against the sale of software in cash amounted to Rs. 10,28,500/-. The assessee filed a proper reconciliation and cash flow statement and demonstrated that apart from the receipt of software sales, there were other receipts also. The same have been recorded in the books of a/c and thus the cash deposits in bank came out from the cash in hand available in the books only. CIT(A) after duly verifying these facts and books of a/c has properly deleted the addition by following observations: 3.2. Revenue's ground no. 2(iii) is against addition of 6 lacs on account of credits appearing in the account of M/s Integra Telecommunication & Software Ltd. (ITSL) The AO has added this amount vide his observations in para 2 at page 2·3 of the impugned assessment order. According to the AO, copy of account of Integra Telecommunication & Software Ltd. Does not match with the confirmation of M/s Integra Telecommunication & Software Ltd. submitted by the assessee which raises serious doubts about the genuineness of the transactions entered by the assessee with M/s Integra Telecommunication & Software Ltd. The AO further observed that the assessee was asked to show cause why addition of Rs. 10 Lacs be not made on account of credits appearing in the account of, M/s Integra Telecommunication & Software Ltd. for which no satisfactory explanation had been filed, the AO added Rs. 6 Lacs as also added Rs. 4 Lacs on account of share application money separately. 3.3. Ld. Counsel contends that copy of account of M/s Integra Telecommunication & Software Ltd. appearing in the account books of the appellant placed at P.B. shows brought forward opening debit balance of Rs. 1,07,000/-. The assessee had further debited an amount of Rs. 4,09,000/- on account 'of ,29,500 shares of Panka Gas Cylinder and 11,400 shares of Moza Paints Pvt. Ltd. sold by it to ITSL besides further debit of Rs. 55,400/- being the sale of fixed assets to ITSL aggregating at Rs. 5,16,000/-. It was against the amount due from ITSL that the assessee had received Rs. 5 Lacs by account payee cheque No. 128813 on 12/10/04 and Rs. 1 Lac by account payee cheque No. 128812 on 12/10/04. Therefore, the observations of the AO made In the assessment order are factually Incorrect and untenable. Further M/s Integra Telecommunication & Software Ltd. had issued copy of appellant's account in their books copy placed at P.B. which was duly filed before the AO which also reveals that that ITSL had debited the account of the appellant with Rs. 1 Lac and Rs. 9 Lacs on 12/10/04 against which they had confirmed the opening balance of Rs. 1,07,000/-share purchased at Rs. 4,09,000/- and Rs. 55,400 for computers, printers and fixtures purchased and Rs.' 4 Lacs towards the share application money paid. ITSL PA No. is AAAC19473Q. CIT(A) after due verification of accounts and explanation, deleted the addition. 3.4. Revenue's ground No. 2(ii) is against the addition of Rs. 4,48,000/- (in fact the figure is. Rs. 4,80,000/- on account of share application money which has been discussed by the AO in para 3 at page 3-4 of the Impugned assessment order. 3.5. According to the AO, the appellant had not submitted any evidence like bank statement or copy of Income-tax return of both share subscribers except submitting confirmations from ITSL and other parties and also did not produce the concerned persons and consequently, according to him onus which lay on the assessee had not been discharged, against which submissions of the assessee are: a) M/s Integra Telecommunication & Software Ltd., C-133; 111 Floor, Saket, New Delhi had deposited share application money of Rs. 4 Lacs which was embedded In account payee cheque No. 128813 dated 12//10/04 for Rs. 9 Lacs deposited In assessee's bank account copy which is placed at P.B. on lDBI Bank which was received from them by the appellant towards purchase of shares and fixed assets. Before the AO, the appellant had filed letter dated 1/11/07 received by the appellant from M/s Integra Telecommunication & Software Ltd. Along with their bank statement which clearly shows debit of Rs. 9 Lacs in their bank account on 12/10/04. Copy of account of the appellant in the books of Integra Telecommunication & Software Ltd. was also filed before the AO and CIT(A) giving therein identity details and PAN No. AAACI9473Q. The above documentary evidence is on the file of the AO, therefore, the observations of the AO to the contrary are factually incorrect. A copy of account of Integra Telecommunication & Software Ltd. in the books of the assessee was also filed before the ASSESSING OFFICER. All these documentary evidence demonstrate that the account of Integra Telecommunication & Software Ltd. was an old account with an opening balance of Rs. 1,07,000/-. The appellant had sold shares worth Rs. 4,09,000/- to M/s Integra Telecommunication & Software Ltd. which were debited to their account. The appellant further received a cheque for RI. 9' Lacs as mentioned above out of which Rs. 5 Lacs were credited to their account in assessee's books on 12/10/04 and Rs. 4 Lacs had been credited to share application money account, against which 20,000 Equity shares of Rs. 10 each at a premium of Rs. 10/- per Share for Rs. 4,00,000/- were allotted for which Information was duly sent to the ROC. Copy of Form No. 2 Intimating the allotment of shares against the share application money filed by the appellant before the Ministry of Company Affairs. b) Rs. 40,000/- from Sh. Narender Kumar, W-252, Chander Shekhar Azad Gali, Main Babarpur Road, Shahdara. Copy of confirmatory letter as filed before the AO is placed at page 34 which clearly mentions his PA No. ACCPS9711 Q. He is being assessed to tax for the last several years, copies of receipt evidencing filing of return computation of his income for the assessment years 2003-04, 2004-05 & 2005-06 along with statement of Affairs as at 31/03/2005 are placed at P.B. It was out of his savings, that he had deposited Rs, 40,000/-· towards the share application money. The amount was later refunded to him on 01/10/2005 by account payee cheque No. 958171 as he was not interested, which stands credited in his bank account at page 41 of the paper book. c) Rs. 40,000/- from Sh. Mool Chand, 29/10A Main Babarpur Road, Shahdara. Copy of confirmatory letter as filed before the AO mentioning his PA No. AAEPC5370P, being assessed to tax for the last several years, copies of receipt evidencing filing of return computation of his income for the assessment years 2003-04, 2004-05 & 2005-06 along with ' statement of Affairs as at 31/03/2005 are on record. It was out of his savings, that he had deposited Rs. 40,000/· towards the share application money. The amount was refunded to him on 01/10/2005 by account payee cheque No. 958170 as he did not want the shares, 'which stands credited in his bank account as is evident account statement. 3.6. Ld. Counsel contends that it is well settled proposition of law that in the case of share application 'money, the appellant has to prove the identity of the subscribers coupled with the fact that they are admitted to have advanced such amount. Both the conditions stand \ satisfied in the case of the appellant in view of the submissions and the documentary 'evidence mentioned above. Following case law is relied upon. Thus, the assessee duly explained and reconciled the position vis a vis share application money and alleged difference in account in the case of ITSL. CIT(A) after due verification of all parameters has rightly deleted the addition. 3.7. Apropos ground no. 5 in respect of M/s Global Info System Ltd. ("GISL"), both the parties agree that the correct figure is Rs. 8,06,000/- (not Rs. 4,06,000/- as mentioned in revenue's ground). Ld. Counsel for the assessee contends that the assessing officer made the addition by following observations: "a) Copy of the account of M/s Global Info system Ltd. In the books of the appellant as filed before the AO is placed at page 51 which shows that there was debit balance of Rs. 9,26,000/- as on 18/09/04 and it was against such amount that the appellant had received cheque of Rs. 4,50,000/- and Rs. 4,76,000/- on 12/10/04. It was through oversight that against the credit of Rs. 4,76,000/-, the words "sale of fixed assets" was written by the appellant. This position could not be cleared before the AO. in view of the submissions made above with regard to various dates of hearing. This fact has now been clarified in the Affidavit of Shri Pawan Kumar Singhal." 3.8. It is pleaded that this amount being on running account, is verifiable from the accounts of GISL and the closing balance. Thus, the addition was made purely due to an inadvertent mistake of the accountant of the assessee. Instead of word 'deposit' , by mistake the word "sale of fixed asset" has been mentioned in account only and not even in P&L a/c. A mistaken description due to over sight cannot be held to tax the assessee, more so when the actual is demonstrated by the assessee. Reliance is placed on Kedarnath Jute Mfg. Co. Ltd. Vs. CIT 82 ITR 363 (SC). 3.6. Apropos ground no. 6, the ld. Counsel for the assessee contends that the assessing officer made the addition by following observations: "The Bank statement of the assessee clearly indicates that on 18.9.04, the assessee company has received cheque of Rs. 8,06,000/- in the Bank account # 206010200000435 with Axis bank from M/s Global Info System Ltd. but the copy of the confirmation submitted by the assessee from M/s Global Info System does not reflect any such credit form M/s Global Info System Ltd. Since the assessee failed to controvert the stand taken in show cause notice issued to the assessee. The assessee has also failed to substantiate the details which the assessee had itself filed. In view of above it in clear that the evidence submitted by the assessee does not support the claim of assessee & thus remained unexplained & hence Rs. 8,06,000/- is added to the income of the assessee. " 3.7. It has been amply demonstrated by the assessee that it received the following amounts by a/c payee cheques: "a) Rs. 4,07,000/- vide cheque no. 000671 received from M/s Global Info System Ltd. Which was duly credited to their account in assessee's books kindly see page 51. b) Rs. 3,99,000/- received by account payee cheque no. 001607 received from TSR Financial Services Pvt. Ltd. Which also was duly credited to their account by the appellant in its account books as is evident from the copy of account placed at P.B. The total of these two amounts comes to Rs. 8,06,000/-. As both the cheques had been debited by the appellant in its bank account on the same day place at page 55, the bank in the statement issued mentioned the first name of M/s Global Info System Ltd. Only. Apart from the entries made in the account books of the appellant coupled with the entries made in the respective account of both the parties. Copy of confirmation of TSR Financial Services (P) Ltd. Along with copy of bank statement showing the cheque no. 1607 dated 18/09/04 debited in their bank statement Rs. 3,99,000/-, placed on P.B. supports the claim of the assessee. 4. We have heard rival contentions and perused the material available on record. Revenue is not in appeal before us on the admission of additional evidence, besides CIT(A) called for remand report from assessing officer who chose not to submit his comments. In view of these facts and circumstances, we are unable to accede to the request of the ld. DR that the matter should be set aside. 4.1. Apropos ground no. 1, the addition was made by the assessing officer observing that the assessee's sale proceeds in cash from software are less than the cash deposits in bank for which the assessee ahs given satisfactory explanation about there being other receipts which are duly incorporated in the account books. In view of these facts we see no infirmity in the order of CIT(A) on this issue. This ground of the revenue is dismissed. 4.2. Apropos ground no. 2, i.e. addition on account of share application money, the major share applicant is ITSL who has contributed Rs. 4 lacs, which also find mention in ground no. 3 in respect of credit of Rs. 6 lacs. It is noteworthy that ITSL is not new to the assessee and had financial transactions with the assessee in earlier years also which is evident from the fact that a sum of Rs. 1,07,000/- appears as opening debit balance in the books of the assessee qua ITSL. The assessing officer made the addition on the ground that assessee furnished two confirmations – one for Rs. 10 lacs and other for Rs. 9 lacs and therefore both were disbelieved. In our considered view, if there is a difference in the confirmations, at least the lower figure thereof should be accepted and both of the confirmations cannot be disregarded more so when the transactions are entered into by cheques. Besides, ld. Counsel contends that there is no difference of Rs. 1 lac as alleged by the assessing officer which is properly reconciled . It is pleaded that the confirmation from ITSL was filed indicating its PAN number, shares were duly issued against the application money. Assessee along with these documents had filed a bank statement showing debit balance of Rs. 9 lacs in the a/c of ITSL. Copy of account of the assessee in the books of ITSL and copy of assessee's bank account showing deposit of Rs. 9 lacs. All these documents were placed before lower authorities and form part of the paper book. Reliance is placed on Hon'ble Delhi High Court judgment in the case of Oasis Textiles 333 ITR 119 for the proposition that by filing of these documents assessee has discharged its onus approving the ingredients of sec. 68. The ITSL is not a new party or a creditor but a known party, whose financial transactions in past have been accepted by the department. Prior to issue of the shares of the assessee company, assessee had sold another shares of Rs. 4,09,000/- to ITSL. This has not been doubted by the department. Thus, when the department itself, on earlier occasion, has accepted the identity and existence of the party, primary onus to prove creditworthiness to purchase shares of Rs. 4,09,000 is discharged. We see no justification in assuming that ITSL was not a genuine party and does not have capacity. Assessee has duly demonstrated that an amount of Rs. 4 lacs was credited to share application money account and Rs. 5 lacs were credited to ITSL other running account. The allotment of shares has been duly intimated by the assessee to ROC. In view of these facts, relying on the judgment of Delhi High Court in the case of Oasis Hospitality (supra), we are of the view that the assessee has discharged its onus approving the share application money u/s 68. The addition is deleted. 4.3. Coming to remaining two minor share applications in respect of Davendra Kumar and Mool Chand, assessee has filed their confirmatory letters along with PAN numbers. This is further supported by the returns of past several years and statement of affairs. We are of the view that assessee has discharged its initial burden in terms of sec. 68 in respect of identity, creditworthiness and genuineness for these two share applicants who deposited Rs. 40,000/- each. In view thereof, we uphold the order of CIT(A) deleting this addition. Thus, ground no. 2 of the revenue's appeal is dismissed. 4.4. Coming to ground no. 3 in respect of balance credit of Rs. 6 lacs in account of ITSL, we have already held that the identity and creditworthiness of this party is established, transactions are through bank a/c. The assessee has received an amount of Rs. 5 lacs by a/c payee cheque no. 128813 dated 12-10-2004 and Rs. 1 lac by a/c payee cheque no. 128812 on 12-10-2004. the debit of these amounts is reflected in ITSL a/c and credited in the assessee's bank account. Copy of reciprocal accounts are also on the record. Under these circumstances we see no infirmity in the order of CIT(A) deleting the addition. This ground of the revenue is also dismissed. 4.5. Apropos ground no. 4, the addition has been made for a notional income of interest. In our considered view there is no enabling provision by which notional income can be added in the hands of the assessee. It is undisputed that assessee neither charged interest from this party nor showed it on accrual basis in the books of a/c. The assessee has not paid any interest on borrowed capital, therefore, there is no interest expenditure also. Thus, it is not a case of diversion of interest bearing funds as the advance to GISL is out of the interest free funds available at the disposal of the assessee. In view of these facts there is no enabling provision to add notional interest and on assumption the amount cannot be added as there is no interest payment by the assessee. This ground of the revenue is dismissed. 4.6. Apropos ground no. 5, on the allegation that the assessee has sold non-existing fixed assets, the fact of the matter is that the assessee received amounts of Rs. 4,50,000/- and Rs. 4,76,000/- by two cheques on 12-10- 2004. It is claimed that due to inadvertent mistake of the assessee the amount of Rs. 4,76,000/- instead of crediting to GISL a/c was wrongly credited to sale of assessee's account. This entry was subsequently corrected in books and the amount was duly credited to GISL's running account. The assessee has filed affidavit also in this behalf, which is not controverted. Since the assessee has demonstrated it to be an inadvertent mistake, merely an accounting entry which is subsequently corrected and explained cannot fasten the assessee with tax liability by assuming it to be an income whereas in realty the amount was by way of advance/ deposit. A mistaken entry cannot convert a receipt on account of deposit loan or advance as income of the assessee. Reliance placed on Kedarnath Jute Mills (supra), by assessee, is well placed. In view thereof we upholding the finding of CIT(A) deleting this addition. 4.7. That leaves us with last ground I respect of Rs. 8,06,000/- from GISL as unexplained cash credit. Ld. Counsel for the assessee has demonstrated that this confusion was created by assessee depositing two cheques by one paying slip into Axis Bank by which the cheque of Rs. 4,07,000/- received from GISL and cheque of Rs. 3,99,000/- received from TSR Financial services were deposited in Axis Bank which issued a transaction slip mistakenly writing it to be from Global Infosis. Thereafter assessee approached the Axis Bank which issued a revised transaction slip correcting the mistake, which is placed on paper book at page no. 43 in which amount of Rs. 8,06,000/- is shown to have been collected from Global Infosys and TSR Financial. Thus assessee's explanation has been corroborated by the banks revised certificate. 4.8. Ld. counsel for the assessee has made reference to the accounts of Global Infosys and TSR Financial in which the respective amounts of Rs. 4,07,000/- and Rs. 3,99,000/- have been credited. The assessing officer made the addition only relying on the mistaken certificate issued by Axis bank ignoring the proper explanation of the assessee which has been duly demonstrated and explained by the assessee. Based thereon and verification CIT(A) has deleted this addition, therefore, we find no infirmity in his order which is upheld. This ground of the revenue is dismissed. 4.9. Ground no. 7 is general in nature requiring no adjudication. 5. In the result, Revenue's appeal is dismissed. Order pronounced in open court on 03 /05/ 2013. Sd/- Sd/- (B.C. MEENA ) (R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated the 3rd day of May, 2013 *MP* Copy forwarded to 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. CIT (ITAT), New Delhi. |
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