Agrawal Coal Corporation (P) Ltd. v. Additional Commissioner of Income Tax

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The Tax Publishers2012 TaxPub(DT) 0375 (Ind-Trib) : (2012) 135 ITD 0270 : (2011) 142 TTJ 0409 : (2011) 063 DTR 0201 : (2012) 013 ITR (Trib) 0531 INCOME TAX ACT, 1961 --Income from undisclosed sources--Addition under section 68Share application money --The assessee was a private limited company engaged in the business of trading in coal. The assessee company, in the year, under consideration, entered in power generation with installation of two wind mills. The assessee declared income of Rs. 83,46,090 in its return filed for the assessment year 2005-06 on 30-12-2005. During scrutiny proceedings the assessing officer noted that 'HCL' applied for 40,000 shares of the assessee company on the face value of Rs. 10 each and premium of Rs. 90 per share. Similarly, 'OTIL' also applied for 10,000 shares of the same face value and the premium per share. The Addl. CIT (AO), referred to the report of Asstt. CIT 5(1), Indore, wherein it was informed that the investigation carried out by him in some other cases also found that HCL and OTIL are not the genuine companies and these merely exist on papers. Such report finds place in the assessment order. This report was confronted to the assessee company, during the assessment proceedings, and after considering the reply the learned assessing officer concluded that the alleged share capital, claimed to be applied by these companies, is unexplained, therefore, the same was added to the income of the assessee company. It is evident from the investigation made by Asstt. CIT 5(1), Indore that both these company are not existing companies in the real sense. These companies are paper companies only and exist nowhere and were used to give accommodation entries to various parties who want to launder their unaccounted money in the guise of share application or unsecured loan or long term capital gain. The HCL company is not existing in real sense the genuineness of transaction is also doubtful. Since assessee failed established identity, creditworthiness and genuineness of transaction, credit in the account of the assessee on account of share application money from HCL Rs. 4,00,000 and share premium amount of Rs. 36,00,000 are being treated as unexplained credit under section 68 and added back to taxable income. *Held:* Justified. The notices issued under section 133(6) of the Act to M/s HCL and M/s OTIL could not be served as these companies were found non-existent at the addresses supplied to the Department by the assessee. Thereafter, commission was issued to Addl. Director of IT (Inv.) Unit-IX-3, Mumbai, to verify the existence/genuineness of these companies, who also reported that the said companies did not exist at the given addresses. The whole issue for adjudication is whether the identity of these companies was established ? During hearing, the learned counsel for assessee claimed that identity of both these companies has been established as both these companies were registered with Registrar of Companies and their IT returns were filed and both are having PANs/bank accounts. We are not agreeing with this proposition because at the time of registration, these companies may be existing either on papers or in real sense but thereafter were specifically found non-existent as the summons/notices issued were returned back unserved and the commission issued with this purpose also found that these companies were non-existent. At the same time, none of the certificates, claimed to be issued by various authorities, does establish the identity of the share applicants as the certificates were issued without physically verifying the existence of applicants, such as IT Department receives returns of income or documents without verification of existence of the persons filing the returns/documents. PAN is also allotted to the applicants on the basis of applications without verifying the existence of applicants at the address given in the application. Likewise, Registrar of Companies also registers a company without physical verification of the existence of the applicant company. There is a specific finding that on verification by the Asstt. CIT in the case of M/s Sahayata Marketing Co. neither the operators of the accounts were available at the addresses given to the bank nor the introducer. Therefore, the assessee cannot claim to have established the identity of both these companies on the basis of some documents. Leave it apart, as mentioned above, the learned counsel for assessee, in reply to a specific query regarding production of any of the directors or the employees of the share applicants before the Bench, the assessee did not comply with the directions of the Bench, therefore, to this limited extent, we are of the view that these share applicants are non-existent and their identity is not proved. It is pertinent to mention here that there is a difference between a private and public limited company as in a private limited company, the public at large is not subscribing the shares as the shares are allotted to close relatives, friends and other known persons who are having faith in the subscribing company on personal relations whereas there is an invitation to the public at large by a public limited company and not necessarily having personal relations and in that case, the individual relations are normally found to be non-existent. In view of these facts, the share applicants are known to the assessee company, being private limited companies, and there should be no difficulty to produce them or their representative to enable the assessing officer to verify the identity, genuineness of the capital claimed to be subscribed by them, therefore, the assessee cannot claim ignorance about these companies. Unless the assessee is able to establish identity of the companies who have subscribed in their share capital, how the Department will proceed against these companies in terms of the verdict of the Hon'ble Supreme Court in the case of Lovely Exports. Any addition in the hands of such subscribing companies is only possible when the assessee is able to establish identity of these companies which the assessee has grossly failed not only before the assessing officer but also before learned Commissioner (Appeals) and the Tribunal. Under these facts and circumstances, there is no question of applying the proposition of law as suggested by the learned counsel for assessee. [Para 23] On the issue of discharge of onus/burden, the assertion of the learned counsel for the assessee is that the onus shifted to the Department when copy of share application form, PAN, name and addresses and ROC registration, etc. were filed by the assessee. We are not agreeing with the submission of the assessee in view of the fact that at the addresses (4 places) given to the Department, these companies were found to be non-existent. Even the Inspector was deputed to verify the addresses who also reported that these companies were not available at the given addresses. It is not possible that the companies making huge investment in the form of share application are not found at the given addresses. There is a possibility that there may be a change of address but till the stage of the Tribunal, not to talk of the assessing officer or the learned Commissioner (Appeals), no such address was furnished by the assessee, therefore, we are of the considered opinion that the onus was not discharged as the assessee neither furnished the correct addresses nor the creditors were produced rather the assessee tried to stall the assessment proceedings by giving misleading facts and incorrect addresses. Even as per preponderance of probabilities, all facts go against the assessee. [Para 24] In view of the facts narrated above and the judicial pronouncements discussed, it can be said that the assessee did not discharge the onus cast upon it by the provisions of the Act. If the provision of 68 is analysed, it speaks about cash credits and the sum found credited in the books of an assessee and the assessee offers no explanation about the nature and source thereof or the explanation is not found satisfactory by the assessing officer then the same may be charged to tax as the income of the assessee. In the present appeal, at any stage the assessee did not file any explanation regarding the identity of the share applicants, therefore, the onus was not discharged by the assessee. A bare reading of section 68 suggest that there has to be credits of amounts in the books maintained by the assessee that such credit has to be of a sum during the previous year and the assessee offers no explanation about the nature and source of such credit or the Explanation offered by the assessee in the opinion of the assessing officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as income of the assessee of that previous year. We are aware that the opinion of the assessing officer is required to be formed objectively with reference to the material available on record. In the present appeals, the assessing officer was never satisfied and the notices/summons issued to the subscribing companies, were found to be fictitious or non-existent, therefore, one fact oozing out that the assessee has not fulfilled the requirement of section 68. A close reading of section 68 makes it clear that in case of section 68 there should be credit entry in the books of account. This is a fundamental difference between these two provisions. The law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee is on him where the nature and source of a receipt whether it be of money or other property, cannot be satisfactorily explained by the assessee, it is open to the Revenue to hold that it is the income of the assessee and no further burden lies on the Revenue to show that the income is from any particular source. [Para 25] There is another perception to look into the decision of the Hon'ble Apex Court in the case of Lovely Exports (P) Ltd. wherein the Hon'ble Apex Court held that if the share application money is received by the assessee from alleged bogus shareholders, whose names are given to the assessing officer, then the Department is free to proceed to reopen their individual assessment in accordance with law, but it cannot be regarded as undisclosed income of the assessee company.' In our view, first of all, the alleged bogus shareholders should be in existence, only then the Department may be in a position to reopen their individual assessment. However, in the present appeals, the share applicants/share subscribers are no more in existence meaning thereby their identity is not proved, therefore, how the Department can proceed to reopen their individual assessments. [Para 27] So far as the contention of the assessee that the company can only be wound up by the order of the Hon'ble High Court and death of the company is known to the process of law and also that the company is still available on the website of the company law board is concerned, this Tribunal not agreeing with this proposition of the assessee because here it is not a case of winding up process rather it is a case of admissibility of claim of the assessee under section 68 of the Act. Since the share applicants/shares subscribers' identity is not proved, therefore, the assessee cannot be permitted to take shelter of technicalities. Even otherwise, website existence on the Company Law Board is not a sole proof that in fact the share applicants are in existence especially when right from the assessment stage to the stage of the Tribunal (three stages) the assessee did not prove the identity of the share applicants. Technicalities also help those who are with clean hands. However, we are in agreement with the argument of the assessee that the winding up powers of a company lies with the Hon'ble High Court but this issue is not before us, therefore, we are refraining ourselves to comment further. It was fairly accepted by the learned counsel for the assessee that in the present appeals merely the assessee filed certain documents which did not prove the identity but did not produce the share applicants/subscribers. At the same time, the CIT-Departmental Representative time and again is harping that the share applicants are merely paper companies. Therefore, from this angle also, we are not convinced with the argument of the assessee. With regard to the contention of learned Authorised Representative that copy of the inquiry conducted by the assessing officer was furnished to the assessee only one day prior to the completion of assessment, we found that the assessee has got full opportunity to substantiate its claim and negate the report before the learned Commissioner (Appeals) but the assessee grossly failed to rebut the report regarding non-establishment of identity of share applicants. The Commissioner (Appeals) has got co-terminus powers to do what the assessing officer has failed to do. Proceedings before Commissioner (Appeals) is also extension of assessment proceedings in addition to the appellate proceedings. However, inspite of full opportunity the assessee failed to rebut the contents of the report which indicated that no shareholders exist in the name of the companies so provided by the assessee. Even though, the report relied upon by the assessing officer was in respect of another assessee but the fact remains that the inquiry was in the case of same share subscribers i.e. M/s HCL and M/s OTL. Under these circumstances, the inquiry conducted in respect of M/s HCL and M/s OTL which are common applicants in the case of all the assessees before this Tribunal, could not be said to be a relevant and not concerning to the assessee in the instant cases. [Para 35] Even otherwise, if the ratio laid down by the Hon'ble Apex Court in the case of Lovely Exports (P) Ltd. while dismissing the Special Leave Petition, it is clear that the initial burden is upon the assessee to prove the identity of share subscribers and once the identity is proved, in case of bogus investment, addition can be made in their individual capacity and not in the case of the company. However, in the present appeals even the identity of such shareholders is not proved as we have discussed above, therefore, the initial onus has not been discharged by the assessee especially when the assessee was confronted with the finding of the commission (Inspector), summons/notices returned unserved and the addresses given by the assessee itself that too at four places were found to be fictitious. The assessee has not given satisfactory evidence to discharge the onus. It has merely given the names of fictitious parties and in our humble opinion this is not a Sufficient compliance, therefore, the decision from Hon'ble Supreme Court in the case of Lovely Exports may not help the assessee. In a later decision dt. 25-10-2010 the Hon'ble jurisdictional High Court in the case of CIT v. STL Extrusion (P) Ltd (2011) 17 ITJ 648 (MP) : even considered various decisions including the off-quoted decision of Divine Leasing & Finance Ltd., Rathi Finlease Ltd., Steller Investment Ltd. and of course Lovely Exports (P) Ltd. wherein the assessee filed list of all subscribers and gave affidavits of all subscribers in the form of confirmations and in that situation the Hon'ble Court held that the assessee is required to establish the identity and source of credits and further held that if the confirmation is given, no addition could be made against the assessee whereas in the case of the assessee the share applicants were found to be non-existent, therefore, this judicial pronouncement from the Hon'ble jurisdictional High Court clearly goes against the assessee. [Para 41] So far as the disallowance of Rs. 6,17,878 paid as interest on unsecured loans in respect of accommodation entries is concerned, since the addition made under section 68 has been sustained, therefore, there is no question of payment of interest as the addition under section 68 was found to be on paper only and not in real sense, therefore, this ground is also dismissed. [Para 47] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0375 (Ind-Trib) : (2012) 135 ITD 0270 : (2011) 142 TTJ 0409 : (2011) 063 DTR 0201 : (2012) 013 ITR (Trib) 0531

INCOME TAX ACT, 1961

--Income from undisclosed sources--Addition under section 68Share application money --The assessee was a private limited company engaged in the business of trading in coal. The assessee company, in the year, under consideration, entered in power generation with installation of two wind mills. The assessee declared income of Rs. 83,46,090 in its return filed for the assessment year 2005-06 on 30-12-2005. During scrutiny proceedings the assessing officer noted that 'HCL' applied for 40,000 shares of the assessee company on the face value of Rs. 10 each and premium of Rs. 90 per share. Similarly, 'OTIL' also applied for 10,000 shares of the same face value and the premium per share. The Addl. CIT (AO), referred to the report of Asstt. CIT 5(1), Indore, wherein it was informed that the investigation carried out by him in some other cases also found that HCL and OTIL are not the genuine companies and these merely exist on papers. Such report finds place in the assessment order. This report was confronted to the assessee company, during the assessment proceedings, and after considering the reply the learned assessing officer concluded that the alleged share capital, claimed to be applied by these companies, is unexplained, therefore, the same was added to the income of the assessee company. It is evident from the investigation made by Asstt. CIT 5(1), Indore that both these company are not existing companies in the real sense. These companies are paper companies only and exist nowhere and were used to give accommodation entries to various parties who want to launder their unaccounted money in the guise of share application or unsecured loan or long term capital gain. The HCL company is not existing in real sense the genuineness of transaction is also doubtful. Since assessee failed established identity, creditworthiness and genuineness of transaction, credit in the account of the assessee on account of share application money from HCL Rs. 4,00,000 and share premium amount of Rs. 36,00,000 are being treated as unexplained credit under section 68 and added back to taxable income. Held: Justified.

The notices issued under section 133(6) of the Act to M/s HCL and M/s OTIL could not be served as these companies were found non-existent at the addresses supplied to the Department by the assessee. Thereafter, commission was issued to Addl. Director of IT (Inv.) Unit-IX-3, Mumbai, to verify the existence/genuineness of these companies, who also reported that the said companies did not exist at the given addresses. The whole issue for adjudication is whether the identity of these companies was established ? During hearing, the learned counsel for assessee claimed that identity of both these companies has been established as both these companies were registered with Registrar of Companies and their IT returns were filed and both are having PANs/bank accounts. We are not agreeing with this proposition because at the time of registration, these companies may be existing either on papers or in real sense but thereafter were specifically found non-existent as the summons/notices issued were returned back unserved and the commission issued with this purpose also found that these companies were non-existent. At the same time, none of the certificates, claimed to be issued by various authorities, does establish the identity of the share applicants as the certificates were issued without physically verifying the existence of applicants, such as IT Department receives returns of income or documents without verification of existence of the persons filing the returns/documents. PAN is also allotted to the applicants on the basis of applications without verifying the existence of applicants at the address given in the application. Likewise, Registrar of Companies also registers a company without physical verification of the existence of the applicant company. There is a specific finding that on verification by the Asstt. CIT in the case of M/s Sahayata Marketing Co. neither the operators of the accounts were available at the addresses given to the bank nor the introducer. Therefore, the assessee cannot claim to have established the identity of both these companies on the basis of some documents. Leave it apart, as mentioned above, the learned counsel for assessee, in reply to a specific query regarding production of any of the directors or the employees of the share applicants before the Bench, the assessee did not comply with the directions of the Bench, therefore, to this limited extent, we are of the view that these share applicants are non-existent and their identity is not proved. It is pertinent to mention here that there is a difference between a private and public limited company as in a private limited company, the public at large is not subscribing the shares as the shares are allotted to close relatives, friends and other known persons who are having faith in the subscribing company on personal relations whereas there is an invitation to the public at large by a public limited company and not necessarily having personal relations and in that case, the individual relations are normally found to be non-existent. In view of these facts, the share applicants are known to the assessee company, being private limited companies, and there should be no difficulty to produce them or their representative to enable the assessing officer to verify the identity, genuineness of the capital claimed to be subscribed by them, therefore, the assessee cannot claim ignorance about these companies. Unless the assessee is able to establish identity of the companies who have subscribed in their share capital, how the Department will proceed against these companies in terms of the verdict of the Hon'ble Supreme Court in the case of Lovely Exports. Any addition in the hands of such subscribing companies is only possible when the assessee is able to establish identity of these companies which the assessee has grossly failed not only before the assessing officer but also before learned Commissioner (Appeals) and the Tribunal. Under these facts and circumstances, there is no question of applying the proposition of law as suggested by the learned counsel for assessee. [Para 23] On the issue of discharge of onus/burden, the assertion of the learned counsel for the assessee is that the onus shifted to the Department when copy of share application form, PAN, name and addresses and ROC registration, etc. were filed by the assessee. We are not agreeing with the submission of the assessee in view of the fact that at the addresses (4 places) given to the Department, these companies were found to be non-existent. Even the Inspector was deputed to verify the addresses who also reported that these companies were not available at the given addresses. It is not possible that the companies making huge investment in the form of share application are not found at the given addresses. There is a possibility that there may be a change of address but till the stage of the Tribunal, not to talk of the assessing officer or the learned Commissioner (Appeals), no such address was furnished by the assessee, therefore, we are of the considered opinion that the onus was not discharged as the assessee neither furnished the correct addresses nor the creditors were produced rather the assessee tried to stall the assessment proceedings by giving misleading facts and incorrect addresses. Even as per preponderance of probabilities, all facts go against the assessee. [Para 24] In view of the facts narrated above and the judicial pronouncements discussed, it can be said that the assessee did not discharge the onus cast upon it by the provisions of the Act. If the provision of 68 is analysed, it speaks about cash credits and the sum found credited in the books of an assessee and the assessee offers no explanation about the nature and source thereof or the explanation is not found satisfactory by the assessing officer then the same may be charged to tax as the income of the assessee. In the present appeal, at any stage the assessee did not file any explanation regarding the identity of the share applicants, therefore, the onus was not discharged by the assessee. A bare reading of section 68 suggest that there has to be credits of amounts in the books maintained by the assessee that such credit has to be of a sum during the previous year and the assessee offers no explanation about the nature and source of such credit or the Explanation offered by the assessee in the opinion of the assessing officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as income of the assessee of that previous year. We are aware that the opinion of the assessing officer is required to be formed objectively with reference to the material available on record. In the present appeals, the assessing officer was never satisfied and the notices/summons issued to the subscribing companies, were found to be fictitious or non-existent, therefore, one fact oozing out that the assessee has not fulfilled the requirement of section 68. A close reading of section 68 makes it clear that in case of section 68 there should be credit entry in the books of account. This is a fundamental difference between these two provisions. The law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee is on him where the nature and source of a receipt whether it be of money or other property, cannot be satisfactorily explained by the assessee, it is open to the Revenue to hold that it is the income of the assessee and no further burden lies on the Revenue to show that the income is from any particular source. [Para 25] There is another perception to look into the decision of the Hon'ble Apex Court in the case of Lovely Exports (P) Ltd. wherein the Hon'ble Apex Court held that if the share application money is received by the assessee from alleged bogus shareholders, whose names are given to the assessing officer, then the Department is free to proceed to reopen their individual assessment in accordance with law, but it cannot be regarded as undisclosed income of the assessee company.' In our view, first of all, the alleged bogus shareholders should be in existence, only then the Department may be in a position to reopen their individual assessment. However, in the present appeals, the share applicants/share subscribers are no more in existence meaning thereby their identity is not proved, therefore, how the Department can proceed to reopen their individual assessments. [Para 27] So far as the contention of the assessee that the company can only be wound up by the order of the Hon'ble High Court and death of the company is known to the process of law and also that the company is still available on the website of the company law board is concerned, this Tribunal not agreeing with this proposition of the assessee because here it is not a case of winding up process rather it is a case of admissibility of claim of the assessee under section 68 of the Act. Since the share applicants/shares subscribers' identity is not proved, therefore, the assessee cannot be permitted to take shelter of technicalities. Even otherwise, website existence on the Company Law Board is not a sole proof that in fact the share applicants are in existence especially when right from the assessment stage to the stage of the Tribunal (three stages) the assessee did not prove the identity of the share applicants. Technicalities also help those who are with clean hands. However, we are in agreement with the argument of the assessee that the winding up powers of a company lies with the Hon'ble High Court but this issue is not before us, therefore, we are refraining ourselves to comment further. It was fairly accepted by the learned counsel for the assessee that in the present appeals merely the assessee filed certain documents which did not prove the identity but did not produce the share applicants/subscribers. At the same time, the CIT-Departmental Representative time and again is harping that the share applicants are merely paper companies. Therefore, from this angle also, we are not convinced with the argument of the assessee. With regard to the contention of learned Authorised Representative that copy of the inquiry conducted by the assessing officer was furnished to the assessee only one day prior to the completion of assessment, we found that the assessee has got full opportunity to substantiate its claim and negate the report before the learned Commissioner (Appeals) but the assessee grossly failed to rebut the report regarding non-establishment of identity of share applicants. The Commissioner (Appeals) has got co-terminus powers to do what the assessing officer has failed to do. Proceedings before Commissioner (Appeals) is also extension of assessment proceedings in addition to the appellate proceedings. However, inspite of full opportunity the assessee failed to rebut the contents of the report which indicated that no shareholders exist in the name of the companies so provided by the assessee. Even though, the report relied upon by the assessing officer was in respect of another assessee but the fact remains that the inquiry was in the case of same share subscribers i.e. M/s HCL and M/s OTL. Under these circumstances, the inquiry conducted in respect of M/s HCL and M/s OTL which are common applicants in the case of all the assessees before this Tribunal, could not be said to be a relevant and not concerning to the assessee in the instant cases. [Para 35] Even otherwise, if the ratio laid down by the Hon'ble Apex Court in the case of Lovely Exports (P) Ltd. while dismissing the Special Leave Petition, it is clear that the initial burden is upon the assessee to prove the identity of share subscribers and once the identity is proved, in case of bogus investment, addition can be made in their individual capacity and not in the case of the company. However, in the present appeals even the identity of such shareholders is not proved as we have discussed above, therefore, the initial onus has not been discharged by the assessee especially when the assessee was confronted with the finding of the commission (Inspector), summons/notices returned unserved and the addresses given by the assessee itself that too at four places were found to be fictitious. The assessee has not given satisfactory evidence to discharge the onus. It has merely given the names of fictitious parties and in our humble opinion this is not a Sufficient compliance, therefore, the decision from Hon'ble Supreme Court in the case of Lovely Exports may not help the assessee. In a later decision dt. 25-10-2010 the Hon'ble jurisdictional High Court in the case of CIT v. STL Extrusion (P) Ltd (2011) 17 ITJ 648 (MP) : even considered various decisions including the off-quoted decision of Divine Leasing & Finance Ltd., Rathi Finlease Ltd., Steller Investment Ltd. and of course Lovely Exports (P) Ltd. wherein the assessee filed list of all subscribers and gave affidavits of all subscribers in the form of confirmations and in that situation the Hon'ble Court held that the assessee is required to establish the identity and source of credits and further held that if the confirmation is given, no addition could be made against the assessee whereas in the case of the assessee the share applicants were found to be non-existent, therefore, this judicial pronouncement from the Hon'ble jurisdictional High Court clearly goes against the assessee. [Para 41] So far as the disallowance of Rs. 6,17,878 paid as interest on unsecured loans in respect of accommodation entries is concerned, since the addition made under section 68 has been sustained, therefore, there is no question of payment of interest as the addition under section 68 was found to be on paper only and not in real sense, therefore, this ground is also dismissed. [Para 47]