COMMISSIONER OF INCOME TAX vs. OASIS HOSPITALITIES (PVT.) LTD.

Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest?

In all these appeals, issue relates to the addition made by the Assessing Officer (AO) under Section 68 of the Income Tax Act (hereinafter referred to as „the Act‟) on account of unexplained share application money. Though the background of the facts in which these additions were made in respect of different assessees may not be identical, but there is lot of similarity. In any case, since principle of law which is to be applied in all these cases is common, by way of this singular judgment all these appeals can be decided. However, in the process we would intend to dispose of these appeals by this common judgment. We would proceed to di th iti f l i fi t i t d th ft th 2011:DHC:567-DB

Section 68 of the Act deals with unexplained incomes and is couched in the following language:

As per the provisions of this Section, in case the assessee has not been able to give satisfactory explanation in respect of certain expenditure or where any sum is found credited in the books of accounts, the AO can treat the same as undisclosed income and add to the income of the assessee. The assessee is required to give satisfactory explanation about the “nature and source” of such sum found credited in the books of accounts.

It is a common knowledge that insofar as the companies incorporated under the Indian Companies Act are concerned, whether private limited or public limited companies, they raise their capital through shares, though the manner of raising the share capital in the private limited companies on the one hand and public limited companies on the other hand, would be different. In the case of private limited companies, normally, the shares are subscribed by family members or persons known/close to the promoters. Public limited companies, on the other hand, generally raise public issue inviting general public at large for 2011:DHC:567-DB

When the companies incorporated under the Companies Act raise their capital through shares, various persons would apply for shares and thus give share application money. These amounts received from such shareholders would, naturally, be the sums credited in the books of account of the assessee. If the AO doubts the genuineness of the investors, who had purportedly subscribed to the share capital, the AO may ask the assessee to explain the nature and source of those sums received by the assessee on account of share capital. It is in this scenario, the question arises about the genuineness of transactions. The plain language of Section 68 of the Act suggests that when the assessee is to give satisfactory explanation, burden of proof is on the assessee to provide nature and source of those receipts.

What kind of proof is to be furnished by the assessee, is the question. It has come up for discussion in various judgments rendered by this Court, other Courts as well as the Supreme Court. The law was discussed by a Division Bench of this Court in the case of Commissioner of Income Tax Vs. Divine Leasing and Finance Ltd. [299 ITR 268]. Since the entire gamut of case law as on that date was visited in the said judgment, we may initiate our discussion by taking note of this case. In this case, the Court highlighted the menace of conversion of unaccounted money through the masquerade or such channels of investment in the share capital of a company and thus stressed upon the duty of the 2011:DHC:567-DB

Taking note of the earlier judgment of Full Bench of this Court in the case of Commissioner of Income Tax Vs. Sophia Finance Ltd. [(1994) 205 ITR 98], the Court observed that the Full Bench had enunciated that Section 68 reposes in the Income-tax Officer or AO the jurisdiction to inquire from the assessed the nature and source of the sum found credited in its Books of Accounts. If the Explanation preffered by the assessed is found not to be satisfactory, further enquiries can be made by the Income-tax Officer himself, both in regard to the nature and the source of the sum credited by the assessed in its Books of Accounts, since the wording of Section 68 is very wide. The Full Bench opined that if the shareholders exist then, possibly, no 2011:DHC:567-DB

The Court also referred to the earlier Division Bench judgment in the case of Commissioner of Income Tax Vs. Dolphin Canpack Ltd. [(2006) 283 ITR 190] and quoted the following observation:

The Court took note of many other judgments of different High Courts and on the analysis of those judgments formulated the following propositions, which emerged as under:

By this common judgment, the Division Bench decided these appeals of which one appeal related to Lovely Exports P. Ltd.. Against the said judgment, Special Leave Petition was preferred, which was dismissed by the Supreme Court vide orders dated 11.01.2008 and is reported as Commissioner of Income Tax Vs. Lovely Exports (P) Ltd. [216 CTR 195 (SC)]. The Court while dismissing the SLP recorded some reasons as well albeit in brief, which is as under:

It is clear from the above that the initial burden is upon the assessee to explain the nature and source of the share application money received by the assessee. In order to discharge this burden, the assessee is required to prove: (a) Identity of shareholder; (b) Genuineness of transaction; and (c) Credit worthiness of shareholders. 2011:DHC:567-DB

In case the investor/shareholder is an individual, some documents will have to be filed or the said shareholder will have to be produced before the AO to prove his identity. If the creditor/subscriber is a company, then the details in the form of registered address or PAN identity, etc. can be furnished.

Genuineness of the transaction is to be demonstrated by showing that the assessee had, in fact, received money from the said shareholder and it came from the coffers from that very shareholder. The Division Bench held that when the money is received by cheque and is transmitted through banking or other indisputable channels, genuineness of transaction would be proved. Other documents showing the genuineness of transaction could be the copies of the shareholders register, share application forms, share transfer register, etc.

As far as creditworthiness or financial strength of the credit/subscriber is concerned, that can be proved by producing the bank statement of the creditors/subscribers showing that it had sufficient balance in its accounts to enable it to subscribe to the share capital. This judgment further holds that once these documents are produced, the assessee would have satisfactorily discharge the onus cast upon him. Thereafter, it is for the AO to scrutinize the same and in case he nurtures any doubt about the veracity of these documents to probe the matter further. However, to discredit the documents produced by the assessee on the aforesaid aspects, there has to be some cogent reasons and materials for the AO and he cannot go into the realm of suspicion. 2011:DHC:567-DB

At this stage, we would like to refer to the judgment of the Bombay High Court in the case of CIT Vs. M/s Creative World Telefilms Ltd. (in ITA No.2182 of 2009 decided on 12.10.2009). The relevant portion of this order is reproduced below:

The Court thus clearly held that once documents like PAN Card, bank account details or details from the bankers were given by the assessee, onus shifts upon the Assessing Officer and it is on him to reach the shareholders and the Assessing Officer cannot burden the assessee merely on the ground that summons issues to the investors were returned back with the endorsement „not traceable‟. Same view is taken by the Karnataka High Court in Madhuri Investments Pvt. Ltd. Vs. ACIT (in ITA No.110 of 2004, decided on 18.02.2006). In this case also, some of share applicants did not appear and notices sent to them were returned with remarks „with no such person‟. Addition was made on that basis which was turned down by the High Court in the following 2011:DHC:567-DB

However, in Commissioner of Income Tax Vs. Arunananda Textiles Pvt. Ltd. (in ITA No.1515 of 2005, decided on 02.03.2010), the Karnataka High Court went to the extent of observing that it was not for the assessee to place material before the Assessing Officer in regard to creditworthiness of the shareholders. Once the company had given the addresses of the shareholders and their identity was not in dispute, it was for the Assessing Officer to make further inquiry. It was borne by the following discussion in the said judgment: “6. The question raised in this appeal are squarely covered by several judgments of the Supreme Court and also the judgment of this Court passed in ASK Brothers Ltd. Vs. Commissioner of Income Tax, wherein this Court following the judgments of the Supreme Court in the case of Commissioner of Income Tax Vs. Lovely Exports (P) Ltd. reported in (20089) 216 CTR (SC 195) and also in the case of Commissioner of Income Tax Vs. Steller Investment Ltd. reported in (2001) 251 ITR 263 (SC) has ruled that it not for the assessee to place material before the Assessing Officer in regard to creditworthiness of the shareholders. If the company has given the addresses of the shareholders and their identity is not in dispute, where they were capable of investing, the assessing officer shall investigate. It is not for the assessee company to establish but it is for the department to enquire with the investor about their capacity to invest the amount in the shares. Therefore, we are of the view that the substantial questions of law framed in this appeal are to be answered against the revenue and in favour of the assessee. Accordingly, this appeal is dismissed.”

This very aspect came up for consideration before different Courts on number of occasion and was dealt with in favour of the assessee.

The observations of the Supreme Court in the case of Lovely Exports (supra) go to suggest that the Department is free to proceed to reopen the individual assessment in case of alleged bogus shareholders in accordance with law and, thus, not remediless. It is, thus, for the AO to make further inquiries with regard to the status of these parties to bring on record any adverse findings regarding their creditworthiness. This would be moreso where the assessee is a public limited company and has issued the share capital to the public at large, as in such cases the company cannot be expected to know every detail pertaining to the identity and the financial worth of the subscribers. Further 2011:DHC:567-DB

We may also usefully refer to the judgment of the Supreme Court in the case of Commissioner of Income Tax Vs. P. Mohanakala [(2007) 291 ITR 278 (SC)]. In that case, the assessee had received foreign gifts from one common donor. The payments were made to them by instruments issued by foreign banks and credited to the respective accounts of the assessees by negotiations through bank in India. The evidence indicated that the donor was to receive suitable compensation from the assessees. The AO held that the gifts though apparent were not real and accordingly treated all those amounts which were credited in the books of account of the assessee, as their income applying Section 68 of the Act. The assessee did not contend that even if their explanation was not satisfactory the amounts were not of the nature of income. The CIT (A) confirmed the assessment. On further appeal, there was a difference of opinion between the two Members of the Appellate Tribunal and the matter was referred to the Vice President who concurred with the findings and conclusions of the AO and the CIT (A). On appeal, the High Court re-appreciated the evidence and substituted its own findings and came to the conclusion that the reasons assigned by the Tribunal were in the realm of surmises, conjecture and suspicion. On appeal to the Supreme Court, the Court while reversing the decision of the High Court held that the findings of the AO, CIT (A) and the Tribunal were based on the material on 2011:DHC:567-DB

We would like to refer to another judgment of the Division Bench of this Court in the case of Commissioner of Income Tax Vs. Value Capital Services P. Ltd. [(2008) 307 ITR 334 (Delhi)]. The Court in that case held that the additional burden was on the Department to show that even if share application did not have the means to make investment, the investment made by them actually emanated from the coffers of the assessee so as to enable it to be treated as the undisclosed income of the assessee. In the absence of such findings, addition could not be made in the income of the assessee under Section 68 of the Act.

It is also of relevance to point out that in Commissioner of Income Tax Vs. Stellar Investment Ltd. [(1991) ITR 287 (Del.)] where the increase in subscribed capital of the respondent company accepted by the ITRO and rejected by the CIT on the ground that a detailed investigation was required regarding the genuineness of subscribers to share capital, as there was a device of converting black money by issuing shares with the help of formation of an investment which was reversed by the Tribunal, this Court held that even if it be assumed that the subscribers to the increased share capital were not genuine, under no circumstances the amount of share capital could be regarded as undisclosed income of the company. This view was confirmed by the Apex Court in CIT Vs. Stellar Investment Ltd. [(2001) 251 ITR 263 (SC)]. 2011:DHC:567-DB

Having taken note of the legal position in detail, we now proceed to decide each appeal on the application of aforesaid principles.

While making the assessment in respect of return filed for Assessment Year 2004-05, the AO noticed that the assessee had received share application money of `3 lacs each from six private limited companies during the year relevant Assessment Year 2003-04. It is for this reason notice under Section 148 of the Act was issued in respect of Assessment Year 2003-04 and reassessment done. The AO made addition of `18 lacs to the income of the assessee on protective basis in the Assessment Year 2004-05 as well. It is for this reason we say that the transaction involved in both the appeals is same.

The order of the AO would reveal that it had received an information from the Investigation Wing which had made various enquiries/investigations on the basis of which it was found that these six investors belong to one Mahesh Garg Group who were not carrying on any real business activity and were rather engaged in the business of providing accommodations entries. They were, thus, entry operators of which the assessee was the beneficiary. According to the AO, the modus operandi involved in 2011:DHC:567-DB

The assessees filed copies of PAN, acknowledgement of filing income tax returns of the companies, their bank account statements for the relevant period, i.e., for the period when the cheques were cleared. However, the parties were not produced in spite of specific direction of the AO instead of taking opportunities in this behalf. Since the so-called Directors of these companies were not produced on this ground coupled with the outcome of the detailed inquiry made by the Investigating Wing of the Department, the AO made the addition. This addition could not be sustained as the primary onus was discharged by the assessee by 2011:DHC:567-DB

We are, therefore, of the opinion that there is no merit in these two appeals, which are accordingly dismissed at the admission stage itself. ITA No.2094 of 2010 31. In this case, the assessee had shown receipt of `99.18 lacs on account of share application money. In order to prove the genuineness of the transactions and identity of the share applicants and their creditworthiness, the assessee had filed confirmation from these parties, which were 30 in number. The assessee had also supplied income tax particulars of these share applicants. The AO issued notices under Section 133(6) of the Act, which remained unserved on 22 out of 30 parties. Even remaining 08 persons did not respond. Local inquiry made through Inspector revealed that the parties did not exist at the given addresses. On inquiries from bank, the AO found various discrepancies in the statement sent by the bank and the statement produced by the assessee. Even some of the names given by the assessee were not the same as in the bank records. The AO confronted entire material to the assessee and allowed various opportunities. However, the assessee did not produce even a single party. Accordingly, the AO made an addition of `99.18 lacs to the income of assessee on account of unexplained share capital under Section 68 of the Act. Similarly, the AO also 2011:DHC:567-DB

The CIT (A) allowed the appeal and deleted the addition. After recording the findings that necessary documents to prove the identity of investors, creditworthiness and genuineness of the transactions were produced by the assessee, he was of the opinion that even when some discrepancies were found in the bank statement of these investors produced by the assessee, facts remain that the AO had himself obtained the copies of the bank statement of some of the share applicants and the perusal of those statements reveals that there was a debit entry in support of demand draft purchased by the share applicant. The assessee had also filed copies of the confirmations in acknowledgement of income tax returns filed by the share applicants from which it was clear that the tax payers were the existing assessees and they had filed the return of income in Delhi itself. On this evidence, it was concluded that the shareholders were identifiable who were assessed to income tax and therefore under no circumstances, the share capital could be treated as undisclosed income of the company.

The Tribunal while confirming the aforesaid view of the CIT (A) has summarized the discussion as under:

Having regard to the decisions noted above, we are of the view that the addition was rightly deleted by the CIT (A) and the Tribunal. Requisite documents were furnished showing the existence of the shareholders from bank accounts and even their income tax details. From bank accounts of these shareholders, it was found that they had deposed certain cash and source thereof was questionable. The AO should have made further probe which he failed to do. Moreover, remedy with the Department lies in reopening the case of these investors and the addition cannot be made in the hands of assessee.

We accordingly dismiss this appeal.

The facts leading to the admission of the aforesaid question of law are as follows:

In these circumstances, the entire receipts of `25,23,500 in respect of these five persons was treated as unexplained investment and made the addition under Section 68 of the Act.

The CIT (A), in appeal, reexamined the entire issue analyzing the evidence in the light of the judgment in the case of Stellar 2011:DHC:567-DB

The Tribunal has also affirmed the aforesaid decision of the CIT (A) in the following manner:

So far as the legal position and the judgment of the Apex Court in the case of Steller Investment Ltd. is concerned, we are of the view that the ratio laid down in the Steller Investment Ltd. is applicable only in those cases where the assessee is a limited company and the shares were quoted in stock exchange. Once the shares are quoted in stock exchange and the subscription is open to public at large, assessee cannot have control over the subscription and also cannot make a verification of the subscribers as subscription can be done by any person. But whenever the issue is subscribed without quoting it on stock exchange by limited or private limited company, the presumption is very strong against the assessee that subscription is available only to the closely connected persons of the assessee. Once the inference is against the assessee that the issue is subscribed by its closely connected persons, the onus is upon the assessee to prove the identify (sic. identification) of the subscribers and their creditworthiness. Their Lordships of the Hon’ble Calcutta High Court in the case of Bola Shankar Cold Storage ..Vs.. JCIT have examined the judgment of the Apex Court in the case of Steller Investment Ltd. and that of the Hon’ble Delhi High Court in the case of Sophia Finance Ltd. and have held that in the case of Steller Investment Ltd. the ratio laid d b h ll h f h lhi i h 2011:DHC:567-DB

The learned counsel for the assessee argued that even when five persons were produced which established the identity and they had categorically stated that they had invested in the shares with their own money, there was no reason to make addition in respect of these persons as well. He also submitted that bank details, etc. in respect of all 15 shareholders were furnished to the CIT (A), even qua for the remand report, but this additional evidence was totally ignored. He referred to the judgment in the case of Steller Investment Ltd. (supra) as well as Lovely Exports P. Ltd. (supra). To buttress his submission that on the facts of this case, the assessee had discharged the onus and no addition could have been made in its hands. The learned counsel for the Revenue, on the other hand, made detailed submissions justifying the orders passed by all the Authorities below.

We have considered these submissions insofar as statements of the persons who are produced are concerned, they are gone into and analyzed by the three Authorities below on the basis of which finding of fact is arrived at that neither their identity is established nor their capacity to invest this kind of money is proved. They are all agriculturists and had not produced a single document to support their version. This is a finding of fact and there is no reason to interfere with the same. Learned counsel for the Revenue had drawn our attention to view all these statements. 2011:DHC:567-DB

On the basis of such statement without an iota of documentary evidence to support, we are of the opinion that the findings of the Authorities below cannot be treated as perverse. It is on proper analysis of the statements of these persons which were recorded by the AO. When we keep in mind the principle of law laid down in the ratio in the aforesaid decisions and apply the same to the facts of this case, it is difficult to find fault with the approach of the Tribunal. We have to keep in mind that the ratio in a decision cannot be applied in each case. The facts and circumstances of each case are to be weighed and examined as to whether a particular ratio decided in a particular case could be applied. As noted above, the initial onus is upon the assessee to establish three things necessary to obviate the mischief of Section 68 of the Act.

Order of the CIT (A) clearly demonstrates that this remand report was sent to the assessee who had submitted his reply dated 10.02.2004, which is even reproduced in the order and thereafter the CIT (A) discussed the same in the light of certain decision cited before him and came to the conclusion that the assessee had not given satisfactory evidence to discharge the onus. It had merely given names of the parties without anything more. That would not be sufficient compliance. Even the bank statement of the assessee which was submitted has not been proved.

For all these reasons, we are of the view that the assessee had not been able to discharge the onus ptomaine and addition was 2011:DHC:567-DB

Thus, while not accepting all the observations made by the Tribunal in the impugned order, we are of the view that the Tribunal is right in holding that insofar as penalty proceedings are 2011:DHC:567-DB