CIT v. Nipun Builders & Develpers Pvt. Ltd.

Case Laws Analysis
Distinguished on ITO v. Blisswood Green Infrastructure & Developers (P) Ltd. 2019 TaxPub(DT) 1095 (Del-Trib)
Distinguished on DCIT v. Sutlej Agro Products Ltd. 2018 TaxPub(DT) 6620 (Del-Trib)
Relied on ITO v. Sohail Financials Ltd 2018 TaxPub(DT) 6558 (Del-Trib)
Distinguished on DCIT v. DRS Roof-Tech & Infrastructural (P) Ltd. 2018 TaxPub(DT) 0557 (Del-Trib)
Distinguished on CIT v. Nipuan Auto (P.) Ltd. 2013 TaxPub(DT) 1936 (Del-HC)
Applied Yadu Hari Dalmia v. CIT 1980 TaxPub(DT) 1088 (Del-HC)
Applied CIT v. Devi Prasad Vishwanath Prasad 1969 TaxPub(DT) 0124 (SC)
Applied CIT v. M. Ganapathi Mudaliar 1964 TaxPub(DT) 0331 (SC)
Relied S. Hastimal v. CIT 1963 TaxPub(DT) 0400 (Mad-HC)
Applied A. Govindarajulu Mudaliar v. CIT 1958 TaxPub(DT) 0195 (SC)

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The Tax PublishersITA 120/2012 2013 TaxPub(DT) 0526 (Del-HC) : (2013) 051 (I) ITCL 0233 : (2013) 350 ITR 0407 : (2013) 256 CTR 0034 : (2013) 214 TAXMAN 0429 : (2013) 082 DTR 0145 INCOME TAX ACT, 1961 --Income from undisclosed sources--Addition under section 68Share application money--Assessee-company filed its loss return, which was reopened under section 147 on the ground of information having been received from investigating wing that share capital shown to have been received by assessee-company was alleged to represent were accommodation entries. Notice under section was send by assessing officer which was allegedly returned back with remarks 'no such company'. Assessee vide letter replied that all notices and call notices were sent to share subscribers by post and served validly by assessee. Rejecting assessee's reply, assessing officer reopened assessment of assessee and made addition under section 68. Both the lower appellate authorities deleted addition. Held: ,/i>Not rightly so. There was been no examination by Tribunal of assessment proceedings in details in order to demonstrate that assessee held discharged its onus to prove not only the identity of the share applicants, but also their credit worthiness and genuineness of transactions. No attempt was made by Tribunal to scrotch surface and probe documentary evidence in some depth, in the light of conduct of assessee and other survending circumstances in order to see whether assessee had discharged its onus under section 68. Under section 68 the onus is upon the assessee to prove the three ingredients, i.e., identity and creditworthiness of the person from whom the monies were taken and the genuineness of the transaction. As to how the onus can be discharged would depend on the facts and circumstances of each case. It is expected of both the sides - the assessee and the Assessing authority - to adopt a reasonable approach. The assessee here is a private limited company. It cannot issue shares in the same manner in which a public limited company does. It has to generally depend on persons known to its directors or shareholders directly or indirectly to buy its shares. Once the monies are received and shares are issued, it is not as if the share-subscribers and the assessee-company lose touch with each other and become incommunicado. Calls due on the shares have to be paid; if dividends are declared, the warrants have to be sent to the shareholders. It is a continuing relationship, even granting that it may not be of the same degree in which it exists between a debtor and creditor. The share-subscribers in the present case have each invested substantial amounts in the assessee's shares, as the chart at pages 2-3 of the assessment order would show. Most of them, barring two or three, are themselves private limited companies. It cannot therefore be contended, as was contended before us on behalf of the assessee, that if the summons issued under section. 131 to the subscribing companies at the addresses furnished by the assessee returned unserved, the assessing officer is duty-bound to enforce their attendance with all the powers vested in him. The unreasonableness of such a general proposition is writ large in the face of the contention. The assessee-company received the share monies; it even says that the communications sent by it at the addresses did not return unserved, yet when the assessing officer requested it that too only after trying to serve the summons unsuccessfully to produce the principal officer of the subscribing companies, the assessee developed cold feet and said it cannot help if those companies did not appear and that it was for the assessing officer to enforce their attendance. It needs to be remembered that the assessing officer did not merely stop with issuing summons; he followed it up with a visit by the inspector who confirmed that no such companies functioned from the addresses furnished by the assessee. Let us see the attitude of the assessee towards discharging its onus in such circumstances. It says that the assessing officer may get the addresses from the ROC's website. We do not think that an assessee can take such an unreasonable attitude towards his onus under section 68, little realising that when the finding is that the subscribing companies have not been found existing at the addresses given by the assessee, it is open to the assessing officer to even hold that the identity of the share-subscribers has not been proved, let alone their creditworthiness and the genuineness of the transactions. It was not open to the assessee, given the facts of this case, to direct the assessing officer to go to the website of the company law department/ROC and search for the addresses of the share-subscribers and then communicate with them for proof of the genuineness of the share subscription. That is the onus of the assessee, not of the assessing officer. [Para 7] So far as the creditworthiness of the share subscribers is concerned, the contention of the assessee is that it was proved by the bank statements of those subscribers submitted before the assessing officer. The assessing officer has not referred to them in the assessment order but it is not in dispute that the copies of the bank statements were furnished before him. Even assuming that the bank statements were filed before the assessing officer, that by itself may not be sufficient to prove the creditworthiness without any explanation for the deposits in the accounts and their source. The usual argument in all such cases, including the present case, is that it is not for the assessee to prove the source of source and origin of origin of the receipts. Mere furnishing of the copies of the bank accounts of the subscribers is not sufficient to prove their creditworthiness. There must be, some positive evidence to show the nature and source of the resources of the share subscriber himself and therefore it is necessary for him to come before the assessing officer and confirm his sources from which he subscribed to the capital. In the present case the assessee did not produce the principal officer of the companies who subscribed to the shares; it merely filed a letter at the counter of the assessing officer, stating that the communications sent by it to the share subscribers have not come back unserved. This is not compliance with the direction of the assessing officer who had issued notice to the assessee to produce the principal officers of the subscribing companies. As is well known, in the case of private limited companies, it cannot be denied that there is a continuing contact and relationship with the share holders and if the assessee was serious enough to establish its case, it ought to have produced the principal officers of the subscribing companies before the assessing officer so that they can explain the sources from which the share subscription was made. That would also have taken care of the difficulty of the assessee in proving the creditworthiness of the subscriber companies. It was, therefore, in the assessee's own interest to have actively participated and cooperated in the assessment proceedings and complied with the direction of the assessing officer to produce the principal officers of the subscribing companies. Instead, the assessee took an adamant, if one may use that expression, attitude and failed to comply with the direction of the assessing officer; not only that, it challenged the assessing officer's finding that the summons sent to the companies came back unserved with the remark no such company, which was also supported by the report of the inspector who made a visit to the addresses. The assessee thus took a very extreme stand which was not justified; certainly it did nothing worthwhile to discharge the onus to prove the creditworthiness of the subscribing companies. [Para 8] The quoted observations of Madras court's opinion will clearly explain the context and setting in which they were made. They cannot, therefore, be understood as placing an embargo on the power of the assessing officer to ask the assessee to prove the creditworthiness of the creditor/share holder for the purpose of section 68. In an appropriate case, if the facts and circumstances justify, it would be open to the assessing officer to seek information from the assessee as to the creditworthiness of the creditor/share subscriber which may include information as to the sources of the creditor/share subscriber. If proving the creditworthiness of the creditor/subscriber is now judicially accepted as one of the ingredients of the onus cast on the assessee under section 68, court does not see how proof of the resources of the creditor/share subscriber can be completely excluded from the sweep of the burden. It may not be required of the assessee to give in-depth particulars and details about the resources of the creditor or the share subscriber, but the minimum required of him would be, information that will prima face satisfy the assessing officer about the creditworthiness. Mere furnishing of the bank statements of the share subscribers without any explanation for the deposits in the accounts may not meet the requirements of section 68. It may be necessary to know the business activities of the share-subscribers in order to ascertain whether they are financially sound and are able to purchase shares for substantial amounts; if they have borrowed monies for making the investment, whether they were capable of repaying them having regard to the nature of their business, volume of the business, etc. These are very relevant, to establish the creditworthiness of the investors. It is for this purpose that it is necessary for the assessee, in appropriate cases where the facts and surrounding circumstances justify, to seek the assistance of the principal officer of the subscribing companies and present him before the assessing officer so that he will be in a position to explain in detail the source from which the shares were subscribed. A curious aspect of the matter which cannot be lost sight of is that the record reveals the assessee's ability to procure the share applicant's bank statement. This speaks volume about its conduct, and belies the argument about its inability to ensure the presence of such company's principal officers. [Para 9] It is true that the assessment order does not show that the investigation report was placed before the assessee for rebuttal. But the addition cannot be deleted merely on that ground. The investigation report which permitted the reopening of the assessment was only a starting point for the enquiry. It was not the sole basis for making the addition. Based on the material contained in the investigation wing's report, the assessing officer had initiated an enquiry into the genuineness of the share subscription. It is because of the suspicion justifiably based on the fact that the investigation wing's report contained information as to the complicity of the companies from whom the assessee received share subscription in the racket of providing accommodation entries for commission, that the assessing officer wanted to enquire into the matter since it is from those companies that the assessee had shown receipt of monies as share capital. In making assessments, including reassessments, the assessing officer has to act on information or material in his possession. If he wants to make use of the material or information, it is certainly necessary according to the principles of natural justice that the information be put to the assessee for rebuttal. There is no requirement that the report of the investigation wing itself should have been put to the assessee because the report only contained material which implicated the companies from whom the assessee claimed to have received share monies in the business of providing accommodation entries for commission. It was, therefore, necessary for the assessing officer to have the information verified because the assessee also has shown receipt of share monies from those companies. The assessing officer had issued summons to the companies in an attempt to verify their identity, existence and the genuineness of the transaction. It was only when he failed to find the companies at the addresses furnished, that he called upon the assessee to produce the principal officers of those companies so that he can elicit the truth behind the assessee's claim. In these circumstances, it was not necessary to have put the report of the investigation wing to the assessee for rebuttal. The assessee can hardly raise the issue, having itself failed to comply with the direction of the assessing officer and having taken an unreasonable attitude towards the discharge of its onus. Therefore, the non-furnishing of the report of the investigation wing to the assessee was not fatal to the validity of the addition. [Para 10] It was nothing to show that the monies represented the undisclosed income of the assessee brought in under the guise of share subscription. It was submitted that it was incumbent upon the assessing officer to show that the monies emanated from the coffers of the assessee in order to sustain the addition under section 68. Court is afraid that these are untenable propositions and were rejected at least on three occasions by the Supreme Court. [Para 11] Section 68 thus only codified the law as it existed before 1-4-1962 and did not introduce any new principle or rule. Therefore the ratio laid down in the three Supreme Court Judgments is equally applicable to the interpretation of section 68. [Para 11] A perusal of the order of the Tribunal shows that it has gone on the basis of the documents submitted by the assessee before the assessing officer and has held that in the light of those documents, it can be said that the assessee has established the identity of the parties. It has further been observed that the report of the investigation wing cannot conclusively prove that the assessee's own monies were brought back in the form of share application money. As noted in the earlier paragraph, it is not the burden of the assessing officer to prove that connection. There has been no examination by the Tribunal of the assessment proceedings in any detail in order to demonstrate that the assessee has discharged its onus to prove not only the identity of the share applicants, but also their creditworthiness and the genuineness of the transactions. No attempt was made by the Tribunal to scratch the surface and probe the documentary evidence in some depth, in the light of the conduct of the assessee and other surrounding circumstances in order to see whether the assessee has discharged its onus under section 68. With respect, it appears to there has only been a mechanical reference to the case-law on the subject without any serious appraisal of the facts and circumstances of the case. [Para 12] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersITA 120/2012
2013 TaxPub(DT) 0526 (Del-HC) : (2013) 051 (I) ITCL 0233 : (2013) 350 ITR 0407 : (2013) 256 CTR 0034 : (2013) 214 TAXMAN 0429 : (2013) 082 DTR 0145

INCOME TAX ACT, 1961

--Income from undisclosed sources--Addition under section 68Share application money--Assessee-company filed its loss return, which was reopened under section 147 on the ground of information having been received from investigating wing that share capital shown to have been received by assessee-company was alleged to represent were accommodation entries. Notice under section was send by assessing officer which was allegedly returned back with remarks 'no such company'. Assessee vide letter replied that all notices and call notices were sent to share subscribers by post and served validly by assessee. Rejecting assessee's reply, assessing officer reopened assessment of assessee and made addition under section 68. Both the lower appellate authorities deleted addition. Held: ,/i>Not rightly so. There was been no examination by Tribunal of assessment proceedings in details in order to demonstrate that assessee held discharged its onus to prove not only the identity of the share applicants, but also their credit worthiness and genuineness of transactions. No attempt was made by Tribunal to scrotch surface and probe documentary evidence in some depth, in the light of conduct of assessee and other survending circumstances in order to see whether assessee had discharged its onus under section 68.

Under section 68 the onus is upon the assessee to prove the three ingredients, i.e., identity and creditworthiness of the person from whom the monies were taken and the genuineness of the transaction. As to how the onus can be discharged would depend on the facts and circumstances of each case. It is expected of both the sides - the assessee and the Assessing authority - to adopt a reasonable approach. The assessee here is a private limited company. It cannot issue shares in the same manner in which a public limited company does. It has to generally depend on persons known to its directors or shareholders directly or indirectly to buy its shares. Once the monies are received and shares are issued, it is not as if the share-subscribers and the assessee-company lose touch with each other and become incommunicado. Calls due on the shares have to be paid; if dividends are declared, the warrants have to be sent to the shareholders. It is a continuing relationship, even granting that it may not be of the same degree in which it exists between a debtor and creditor. The share-subscribers in the present case have each invested substantial amounts in the assessee's shares, as the chart at pages 2-3 of the assessment order would show. Most of them, barring two or three, are themselves private limited companies. It cannot therefore be contended, as was contended before us on behalf of the assessee, that if the summons issued under section. 131 to the subscribing companies at the addresses furnished by the assessee returned unserved, the assessing officer is duty-bound to enforce their attendance with all the powers vested in him. The unreasonableness of such a general proposition is writ large in the face of the contention. The assessee-company received the share monies; it even says that the communications sent by it at the addresses did not return unserved, yet when the assessing officer requested it that too only after trying to serve the summons unsuccessfully to produce the principal officer of the subscribing companies, the assessee developed cold feet and said it cannot help if those companies did not appear and that it was for the assessing officer to enforce their attendance. It needs to be remembered that the assessing officer did not merely stop with issuing summons; he followed it up with a visit by the inspector who confirmed that no such companies functioned from the addresses furnished by the assessee. Let us see the attitude of the assessee towards discharging its onus in such circumstances. It says that the assessing officer may get the addresses from the ROC's website. We do not think that an assessee can take such an unreasonable attitude towards his onus under section 68, little realising that when the finding is that the subscribing companies have not been found existing at the addresses given by the assessee, it is open to the assessing officer to even hold that the identity of the share-subscribers has not been proved, let alone their creditworthiness and the genuineness of the transactions. It was not open to the assessee, given the facts of this case, to direct the assessing officer to go to the website of the company law department/ROC and search for the addresses of the share-subscribers and then communicate with them for proof of the genuineness of the share subscription. That is the onus of the assessee, not of the assessing officer. [Para 7] So far as the creditworthiness of the share subscribers is concerned, the contention of the assessee is that it was proved by the bank statements of those subscribers submitted before the assessing officer. The assessing officer has not referred to them in the assessment order but it is not in dispute that the copies of the bank statements were furnished before him. Even assuming that the bank statements were filed before the assessing officer, that by itself may not be sufficient to prove the creditworthiness without any explanation for the deposits in the accounts and their source. The usual argument in all such cases, including the present case, is that it is not for the assessee to prove the source of source and origin of origin of the receipts. Mere furnishing of the copies of the bank accounts of the subscribers is not sufficient to prove their creditworthiness. There must be, some positive evidence to show the nature and source of the resources of the share subscriber himself and therefore it is necessary for him to come before the assessing officer and confirm his sources from which he subscribed to the capital. In the present case the assessee did not produce the principal officer of the companies who subscribed to the shares; it merely filed a letter at the counter of the assessing officer, stating that the communications sent by it to the share subscribers have not come back unserved. This is not compliance with the direction of the assessing officer who had issued notice to the assessee to produce the principal officers of the subscribing companies. As is well known, in the case of private limited companies, it cannot be denied that there is a continuing contact and relationship with the share holders and if the assessee was serious enough to establish its case, it ought to have produced the principal officers of the subscribing companies before the assessing officer so that they can explain the sources from which the share subscription was made. That would also have taken care of the difficulty of the assessee in proving the creditworthiness of the subscriber companies. It was, therefore, in the assessee's own interest to have actively participated and cooperated in the assessment proceedings and complied with the direction of the assessing officer to produce the principal officers of the subscribing companies. Instead, the assessee took an adamant, if one may use that expression, attitude and failed to comply with the direction of the assessing officer; not only that, it challenged the assessing officer's finding that the summons sent to the companies came back unserved with the remark no such company, which was also supported by the report of the inspector who made a visit to the addresses. The assessee thus took a very extreme stand which was not justified; certainly it did nothing worthwhile to discharge the onus to prove the creditworthiness of the subscribing companies. [Para 8] The quoted observations of Madras court's opinion will clearly explain the context and setting in which they were made. They cannot, therefore, be understood as placing an embargo on the power of the assessing officer to ask the assessee to prove the creditworthiness of the creditor/share holder for the purpose of section 68. In an appropriate case, if the facts and circumstances justify, it would be open to the assessing officer to seek information from the assessee as to the creditworthiness of the creditor/share subscriber which may include information as to the sources of the creditor/share subscriber. If proving the creditworthiness of the creditor/subscriber is now judicially accepted as one of the ingredients of the onus cast on the assessee under section 68, court does not see how proof of the resources of the creditor/share subscriber can be completely excluded from the sweep of the burden. It may not be required of the assessee to give in-depth particulars and details about the resources of the creditor or the share subscriber, but the minimum required of him would be, information that will prima face satisfy the assessing officer about the creditworthiness. Mere furnishing of the bank statements of the share subscribers without any explanation for the deposits in the accounts may not meet the requirements of section 68. It may be necessary to know the business activities of the share-subscribers in order to ascertain whether they are financially sound and are able to purchase shares for substantial amounts; if they have borrowed monies for making the investment, whether they were capable of repaying them having regard to the nature of their business, volume of the business, etc. These are very relevant, to establish the creditworthiness of the investors. It is for this purpose that it is necessary for the assessee, in appropriate cases where the facts and surrounding circumstances justify, to seek the assistance of the principal officer of the subscribing companies and present him before the assessing officer so that he will be in a position to explain in detail the source from which the shares were subscribed. A curious aspect of the matter which cannot be lost sight of is that the record reveals the assessee's ability to procure the share applicant's bank statement. This speaks volume about its conduct, and belies the argument about its inability to ensure the presence of such company's principal officers. [Para 9] It is true that the assessment order does not show that the investigation report was placed before the assessee for rebuttal. But the addition cannot be deleted merely on that ground. The investigation report which permitted the reopening of the assessment was only a starting point for the enquiry. It was not the sole basis for making the addition. Based on the material contained in the investigation wing's report, the assessing officer had initiated an enquiry into the genuineness of the share subscription. It is because of the suspicion justifiably based on the fact that the investigation wing's report contained information as to the complicity of the companies from whom the assessee received share subscription in the racket of providing accommodation entries for commission, that the assessing officer wanted to enquire into the matter since it is from those companies that the assessee had shown receipt of monies as share capital. In making assessments, including reassessments, the assessing officer has to act on information or material in his possession. If he wants to make use of the material or information, it is certainly necessary according to the principles of natural justice that the information be put to the assessee for rebuttal. There is no requirement that the report of the investigation wing itself should have been put to the assessee because the report only contained material which implicated the companies from whom the assessee claimed to have received share monies in the business of providing accommodation entries for commission. It was, therefore, necessary for the assessing officer to have the information verified because the assessee also has shown receipt of share monies from those companies. The assessing officer had issued summons to the companies in an attempt to verify their identity, existence and the genuineness of the transaction. It was only when he failed to find the companies at the addresses furnished, that he called upon the assessee to produce the principal officers of those companies so that he can elicit the truth behind the assessee's claim. In these circumstances, it was not necessary to have put the report of the investigation wing to the assessee for rebuttal. The assessee can hardly raise the issue, having itself failed to comply with the direction of the assessing officer and having taken an unreasonable attitude towards the discharge of its onus. Therefore, the non-furnishing of the report of the investigation wing to the assessee was not fatal to the validity of the addition. [Para 10] It was nothing to show that the monies represented the undisclosed income of the assessee brought in under the guise of share subscription. It was submitted that it was incumbent upon the assessing officer to show that the monies emanated from the coffers of the assessee in order to sustain the addition under section 68. Court is afraid that these are untenable propositions and were rejected at least on three occasions by the Supreme Court. [Para 11] Section 68 thus only codified the law as it existed before 1-4-1962 and did not introduce any new principle or rule. Therefore the ratio laid down in the three Supreme Court Judgments is equally applicable to the interpretation of section 68. [Para 11] A perusal of the order of the Tribunal shows that it has gone on the basis of the documents submitted by the assessee before the assessing officer and has held that in the light of those documents, it can be said that the assessee has established the identity of the parties. It has further been observed that the report of the investigation wing cannot conclusively prove that the assessee's own monies were brought back in the form of share application money. As noted in the earlier paragraph, it is not the burden of the assessing officer to prove that connection. There has been no examination by the Tribunal of the assessment proceedings in any detail in order to demonstrate that the assessee has discharged its onus to prove not only the identity of the share applicants, but also their creditworthiness and the genuineness of the transactions. No attempt was made by the Tribunal to scratch the surface and probe the documentary evidence in some depth, in the light of the conduct of the assessee and other surrounding circumstances in order to see whether the assessee has discharged its onus under section 68. With respect, it appears to there has only been a mechanical reference to the case-law on the subject without any serious appraisal of the facts and circumstances of the case. [Para 12]