ITO, NEW DELHI vs. M/S TARUN ENTERPRISES PVT. LTD.,, DELHI

PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER

The Assessing Officer completed the assessment u/s 143(3) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) at an income of Rs.52,50,355/- after adding Rs. 45.00 lacs on account of share capital as unexplained sum u/s 68 of the Act. The Ld. CIT (A), on appeal, deleted this addition. Now, the department is in appeal against the deletion by the Ld. CIT (A).

S.No. Name Amount (Rs.) IKA processors Distributors Pvt. Ltd. 11,00,000/-

1. 1. Junoon Capital Services Pvt. Ltd. 10,00,000/- 2.

3. Reena Oil Industry Pvt. Ltd. 5,00,000/- 4. Reena Plastic Pipes Pvt. Ltd. 10,00,000/- 5. At All Times Yours Securities Pvt. Ltd. 4,00,000/- Instant Travels & Tour Pvt. Ltd. 5,00,000/- 6. Total 45,00,000/-

The Assessing Officer, however, did admit that on enquiry, confirmations, Profit/Loss account and Balance Sheet were Assessment Year 2006-07 furnished by the investing companies. He accordingly added back the entire sum received from the six companies u/s 68 of the Act.

a) Name and address of the shareholders b) Income Tax particulars of the shareholders c) Share application forms d) Confirmation of shareholders with regard to share capital subscribed by them e) Affidavits of the shareholders with regard to the share capital subscribed by them f) Resolution of the Board of Directors of the shareholder with regard to investments made in the share capital of the assessee company

records of the shareholders/investing companies. He also held that the Assessing Officer had not controverted these facts before proceeding to make the addition. Thus, as per the Ld. CIT (A), 3 Assessment Year 2006-07 the assessee had discharged its burden of providing basic details required for verification of the identity of the creditor, creditworthiness of the creditor and genuineness of the transaction. He also observed that the share applicants were also allotted shares and the details were made available. He also observed that the Assessing Officer had not brought anything on record to dispute the facts/details furnished by the assessee despite conducting independent inquiries in terms of section 133(6) of the Act. He, accordingly, deleted the entire addition.

and again pointed out that in spite of availing time, the assessee did not produce the Directors of the six investing companies. He also reiterated that the Balance Sheets of the investing companies did not reflect their investments in the assessee company and hence there was no genuine subscription to the share capital as has been alleged by the assessee.

the following details/documents. He submitted that in response, the investing companies had submitted confirmations of their 4 Assessment Year 2006-07 subscription in the share capital of the company, copies of acknowledgement of their income tax return, copies of their bank statement from which investment in the share capital of company was made by them, copies of their audited statement of accounts.

He further submitted that the assessee had proved the genuineness of the transactions by filing the copies of the cheques issued by the share applicants. It has also proved the creditworthiness or the financial strength of the subscriber/creditor. It has offered an explanation about the nature and source of money found credited in its book of account as envisaged u/s 68. He submitted that once the identity of share applicant/shareholders is proved, there is no case for addition in the hands of the assessee company. If there was any doubt about the creditworthiness of share applicant/s, necessary action should have been taken in the hands of share applicant/s. The Ld. AR stated that adverse inference cannot be drawn against the assessee if the investment is not properly shown by the shareholders in their Balance Sheet/s. He submitted that in view of the aforesaid fact, there was no reason left for the A.O. to draw any adverse inference. The assessee company cannot be expected to know as to why the investments made by them did not figure Assessment Year 2006-07 in their investment details. He submitted that the assessee company had specifically requested the A.O. to confront the shareholder companies with the necessary documentary evidences furnished by the assessee before him and all the shareholders independently and directly confirmed before the A.O. about their having made investment in the share capital of company. Once the A.O. had independently issued notices to the shareholders and in response to that the shareholders had confirmed these investments along with documentary evidences including the bank statements, there is no logic for the A.O. to doubt the genuineness of the capital capital.

‘There cannot be two opinions on the aspect that the pernicious practice of conversion of unaccounted money through the masquerade or channel of investment in the share capital of a company must be firmly excoriated by the Revenue. Equally, where the preponderance of evidence indicates absence of culpability and complexity of the Assessee it should not be harassed by the Revenue’s insistence that it should prove the negative. In the case of public issue, the company concerned cannot be expected to know every details pertaining to the identity as well as financial worth of each of its subscribers. The company must, however, maintain and make available to the Assessing Officer for his perusal, all the information contained in the statutory share application documents. In the case of private placement the legal regime would not be the same. A delicate balance must be maintained while walking the tightrope of section 68 and 69 of the Income Tax Act. The burden of proof can seldom be discharged to the hilt by the assessee; if the Assessing Officer harbours doubts of the legitimacy of any subscription he is empowered, nay duty-bound, to carry out thorough investigations. But if the Assessing Officer fails to unearth any wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the company.’ ‘Further, a distillation of the precedents yields the following proposition of law in the context of section 68 of the Income Tax Act. The Assessee has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely : whether it has been transmitted through banking or other indisputable channels; (3) the credit worthiness or financial strength of the creditor/subscriber; (4) if Assessment Year 2006-07 relevant details of the address of PAN identity of the creditor/subscriber are furnished to the Department along with copies of the shareholders Register, Share Application Forms, Share Transfer Register etc. it would constitute acceptable proof or acceptable explanation by the assessee; (5) the Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notice; (6) the onus would not stand discharged if the creditor/subscriber denied of repudiated the transaction set up by the assessee nor should the Assessing Officer take such repudiation at face value and construe it, without more, against the assessee; (7) the Assessing Officer is duty- bound to investigate the credit worthiness of the creditor/subscriber the genuineness of the transaction and the veracity of the repudiation.”

Can the amount of share money be regarded as undisclosed income under s. 68 of IT Act, 1961? We find no merit in this Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.

Auto Pvt. Ltd. (2014) 361 ITR 155 (Delhi) held as under:-

Assessment Year 2006-07 “10. ………..Whereas in the present case, the identity of the two companies which are sister companies stood established. Furthermore, this is not a case of mere furnishing of copies of bank accounts of the subscribers. But, in the present case, as noted by the Commissioner of Income-tax (Appeals) the assessee had filed the income-tax returns of the subscriber companies as also their bank statements and balance- sheets in addition to the confirmation letters from the said two companies. A copy of Form No. 2 filed by the assessee with the Registrar of Companies regarding the allotment of shares to the said two companies had also been furnished. It is in this backdrop that the Commissioner of Income-tax (Appeals) had concluded that the assessee had been able to prove its case and that the Assessing Officer could not shift the burden back onto the assessee-company without the Assessing Officer producing any tangible material to doubt the veracity of the documents furnished by the assessee. The Income-tax Appellate Tribunal concurred with the views taken by the Commissioner of Income-tax (Appeals).”

The addition in regard to the share capital cannot be treated as the undisclosed income of the assessee if the share application Assessment Year 2006-07 money is received by the assessee company from alleged bogus shareholders whose names are given to the AO. Further the Hon’ble Supreme Court has categorically held that the Revenue is free to proceed to reopen the individual assessments of such alleged bogus shareholders. In these circumstances, respectfully following the decision of the Hon’ble jurisdictional High Court as also Hon’ble Supreme Court referred to supra, the addition made by the AO and deleted by the learned CIT (A) represented by the increase in share capital of the assessee cannot be treated as unexplained cash credits in the hands of the assessee. We have no hesitation to conclude that the assessee has provided necessary details including the ward/circle where the share applicants were assessed to income tax and discharged the onus cast on it. The share applicants were also allotted shares and the details were made available. The AO has not brought anything on record to dispute the facts/details furnished by the assessee despite conducting independent enquiries in terms of S. 133(6).

The assessee cannot be fastened with tax liability for failing to do an unreasonable and unjustified act of production of director/s of Shareholders/Directors of Investing Companies. Moreover there is no information that shareholders/investing companies are involved in providing accommodation entries. The assessee cannot be penalized for the mistakes/faults committed by the share holders. The AO has not found any discrepancy in the books of account and bank accounts maintained by the assessee.

The order is pronounced in the open court on 22.02.2016.