ACIT, NEW DELHI vs. M/S D.K.B. INFRASTRUCTURE PVT. LTD., NEW DELHI

PER A.T. VARKEY, JUDICIAL MEMBER :

“1. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of Rs.70,00,000/- made by the AO on account of unexplained cash credit u/s 68 of the IT Act, 1961. 2. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of Rs.1,40,000/- made by the AO on account of 2% commission.”

3.1 The AO observed that during the year under consideration, the share capital of the assessee was increased from Rs.1,00,000/- to Rs.43,00,000/- i.e. an increase of Rs.42,00,000/- along with an increase of Rs.3,78,00,000/- in the share premium account. The AO asked the assessee to produce the details of these increases and details of newly introduced share capital and to prove the identity, creditworthiness & genuineness of the parties to whom the shares were allotted. In response to the same, assessee furnished a list of 23 parties to whom the shares were allotted along with number of shares allotted to each. However, the AO observed that no credible submissions were made which could prove the Existence, Identity, Creditworthiness and Genuineness of these transactions.

Moreover, the AO observed that a perusal of the list of parties to whom these shares were allotted revealed that names of four parties from this list figures in the information on accommodations entries received from the Directorate of Income Tax (Investigation), New Delhi. The names of these parties along with number of shares allotted to each and the share application money along with increased share premium are as under:

SL.No. Name of the Parties Shares Share application Allotted money 1. M/s Archit Fincap Limited 9000 Rs. 9,00,000/- 2. M/s At All Time Your Securities Ltd 42400 Rs.42,40,000/- 3. M/s Focus Industrial Resources Limited 6600 Rs. 6,60,000/- 4. M/s Paras Fincap Pvt. Ltd. 12000 Rs.12,00,000/- Total : 70000 Rs.70,00,000/- The AO observed that the aforesaid four parties had invested a total sum of Rs.70 lakhs in the assessee company as share application money. But the AO observed that as per the information received from the DIT (Investigation), New Delhi, either these parties are in the list of beneficiary of accommodation entries or in the list of accommodation entry providers to other companies. Further, the AO noted that the enquiries conducted by the Investigation Wing of the department revealed that most of the entry operators were charging commission @ 2% for giving these accommodation entries.

3.2 The AO asked the assessee to produce balance sheets, statement of companies, bank accounts, copy of ITR, confirmations of the parties and other evidences to ascertain the Identity, Creditworthiness and Genuineness of the parties and also their personal appearance to prove the existence of the parties, specially the aforesaid four parties. In response to that, nobody appeared on the next date of hearing. Therefore, the AO issued summons u/s 131 of the Act to the aforesaid four companies requiring them to produce the aforesaid documents with their personal appearance. None attend on the date of hearing, however, written submissions along with conformation of party and statement of bank account were received by post for all four entry operators but the balance sheet and ITR were not filed and also no documentary proof evidencing the source of funding was furnished. Therefore, the AO observed that these submissions were grossly insufficient to prove the creditworthiness or genuineness of these transactions and moreover the existence of these parties was even more doubtful. After perusing the submissions of the assessee and failure on the part of the aforesaid four companies to make representation before him, the AO observed that these parties did not exist and they were paper companies who were engaged in the malpractice of providing accommodation entry and the assessee had routed its unaccounted money through them in the guise of application money.

3.3 In the end, the AO observed that despite availing more than sufficient and fair opportunity for proving the existence, identity, creditworthiness & genuineness of the above four companies, assessee failed to provide any specific detail i.e. confirmation from the investor, copies of ITRs, Balance-sheet and bank statement of the parties. He further observed that the assessee has not come forward to prove the existence & creditworthiness of these parties on account of failure to produce the parties for verification of the transactions. The onus to do so lies on the assessee which has not been discharged by it.

Therefore, the AO held that the amount of Rs.70 lakhs be treated as unexplained credit as per the provisions of section 68 Act and added the same to the income of the assessee.

3.4 During the enquiries conducted by the Investigation Wing of the department, the AO concluded that most of the entry operators were charging commission @ 2% for giving these accommodation entries. The AO observed that this commission had not been booked by the assessee and had been given out of the unaccounted income, therefore, the AO held that the amount of Rs.1,40,000/- be added to the income of the assessee.

“4.3 I have carefully considered the assessment order, remand report of the AO and written submissions made by the ld. AR. It is argued by the ld. AR that the impugned share application/premium money totaling Rs.70,00,000/- was received from four companies, Namely, M/s At All times Yours Securities Pvt. Ltd. (Rs.42,40,000/-), M/s Focus Industrial Resources Ltd. (Rs.6,60,000/-), M/s Archit Fincap Ltd. (Rs.9,00,000/-), M/s Paras Fincap Pvt. Ltd. (Rs,12,00,000/-), by account payee cheques/demand draft. It is argued that the appellant company had received share application/premium amount from a total 23 parties (including the above four parties) during the year under consideration and had submitted copies of confirmations from the said companies confirming the payment of the above amount as share application/premium money, copies of PAN cards of the respective companies, share application forms, share allotment details and bank account copies alongwith Balance Sheet and P&L Account etc. of the above investor companies before the AO in support of its claim. It is argued by the Id. AR that the appellant has discharged its initial onus with regard to the above transactions. It is argued that the AO has accepted the share application/premium amount received in respect of 19 parties and has selectively added the amounts pertaining to the above four parties only on the basis of information from the Investigation Wing, although similar details and documents had been filed in respect of each of the above 23 parties before the AO. It is further argued that the AO also issued summons u/s 131 to the above four parties which were duly served

AO. It is argued that the addition has been made by the AO merely on the basis of information received from the Investigation Wing which was at the back of the appellant and on account of inability of the appellant to produce the directors of the above four investor companies personally before the AO. It is further argued that the appellant company was incorporated on 14.02.2006 with the main object of carrying out business of real estate and infrastructure development and has not commenced its business, other than raising the share capital during the year under consideration which has been invested in bank deposits / loans on which interest income has been earned which has been shown for taxation. It is argued that since this is practically the first year of the company and the business has not commenced, the impugned addition u/s 68 is bad in law. It is also argued that cross examination in relation to the evidences if any with the AO pertaining to the above company was not provided to the appellant by the AO, although specifically asked for by the appellant. It is further argued that the even in the event of the investor companies being bogus, as alleged, no addition can be made u/s 68 in the hands of the appellant company. The ld. AR has accordingly argued that the said addition of Rs.70,00,000/- u/s 68 and Rs.1,40,000/- as estimated commission made in the hands of the appellant company is illegal. The ld. AR has relied upon a plethora of case laws in support of his claim. On careful consideration of the matter, I find that the above contention of the Id. AR cannot be rejected on merit. The AO has also not been able to bring on record any valid material evidence to disprove the claim of the appellant in this regard. The AO has also not made any adverse comment in his remand report on the merit of the case and the large number of documentary evidences relied upon by the appellant.

4.3.1. Further, I find that apart from the case laws relied upon by the ld. AR, the established legal position on the subject under consideration as adopted in a large number of case laws is as follows :

4.3.2. As held in the case of R. B. Mittal v. CIT 246 ITR 283 (AP) in an enquiry u/s 68, the rule of audi alteram partem has to be observed and the assessee must be given a fair and reasonable hearing to discharge the burden cast on him u/s 68 of the Act.

4.3.3. Further, it is settled law that in the matter of cash credit, the initial onus lies on the assessee to prove the genuineness of the transaction alongwith the identity of the lender/investor and his creditworthiness. Having done so, the appellant in the instant case has discharged the onus cast upon it. Beyond this, for the charge of unexplained cash credit to stick, the onus lies on the AO to disprove the claim of the assessee by establishing that the evidence filed by the assessee was false and by bringing new material on record and failure to do so would vitiate the addition made on this count. Reference in this regard can be made the decisions in the case of CIT v. Orissa Corporation Pvt. Ltd. 158 ITR 78

(SC) and CIT v. Rohini Builders 256 ITR 360 (Guj.). It was also held in the case of CIT v. Bedi & Co. P. Ltd. (1998) 230 ITR 580 (SC) that where prima-facie the inference on facts is that the assessee's explanation is probable, the onus will shift to the revenue to disprove it and the assessee's explanation in such case cannot be rejected on mere surmises. Further, it was held in Khandelwal Constructions v. CIT (1997) 227 ITR 900 (Gau.) that since the satisfaction of the AO is the basis for invocation of the powers u/s 68, such satisfaction must be derived from relevant factors on the basis of proper inquiry by the AO and such inquiry must be reasonable and Just.

4.3.4. It is also settled law that it is mandatory for the AO to confront the assessee with any material collected by the AO at the back of the assessee, and in case of statement of third party recorded at the back of the assessee, opportunity of cross examination has to be offered to the assessee, failing which the said material/statement etc. will be rendered on unreliable and additions made on the basis of such material/statement etc. shall be rendered illegal. Reference in this regard can be made to the decisions in the case of R. B. Shreeram Durga Prasad 176 ITR 169 (SC), 125 ITR 713 (SC), Jindal Vegetable (order of Hon'ble Delhi High Court in of 2007, 174 Taxmann 440 (Raj.) and Laxman Bhai Patel (order of Hon'ble Gujarat High Court dated 22.07.2008 in ITR no. 41/1997).

4.3.5. Further, in the case of N.P. Garodia (order dated 13.01.2009 of Hon'ble P & H High Court in of 2008) and in the case of Brij Pal Sharma (order dated 17.02.2009 in ITA no. 685 of 2008 of Hon'ble P & H High Court) it was held that where the assessee provides identity and details pertaining to the lenders/creditors and is unable to produce them and requests the AO to issue summons u/s 131 for their attendance, it is the duty of the AO to issue such summons, failing which the addition would get deleted. It is also held in CIT v. Orissa Corporation Pvt. Ltd. 158 ITR 78 (SC) and Anis Ahmed 297 ITR 441 (SC) that mere non-production of the lender/shareholder cannot be a ground for making addition u/s 68.

4.3.6. Similarly as held in the case of CIT v. Metachem Industries (2000) 245 ITR 160 (MP) where a credit is shown to have come from a person other than the assessee, there is no further responsibility of the assessee to show that it has come from accounted source of the lender, as long as the fact that he had made the advance and was capable of making the advance are established. It was held by the Hon'ble Madras High Court in Hastimal (S) v. CIT (1963) 49 ITR 273 that after a lapse of decade, the assessee should not be placed upon the rack and called upon to explain not merely the origin and source of a capital contribution, but also the origin of origin and source of the source.

4.3.7. Further, I find that the Apex Court in CIT v Lovely Exports (P) Ltd. (2008) 216 CTR 195 held that the even if the share application money received by the appellant company is from alleged bogus shareholder, whose identity is produced by the appellant company, the revenue can always proceed against such shareholders and if necessary reopen their individual assessment. Similar decision is also taken in the case of CIT v. Steller Investment Ltd. (1991) 192 ITR 287 (Del.), (2000) 251 ITR 287 (SC), CIT v. Sophia Finance Ltd. 205 ITR 98 (Del.)(FB), CIT v. Divine Leasing & Finance Ltd. (SLP no. CC 375/2008 arising out of of the High Court of Delhi), CIT (Kolkata) v. M/s Shipra Retailers (P) Ltd. (SLP no. CC 451/2008 arising out of ITA no. 576/2004 of the High Court of Calcutta), CIT v. Pondy Metal & Rolling Mills (P) Ltd. (SLP no. CC 12860/2007 arising out of ITA no. 788/2006 of the High Court of Delhi) and CIT v. General Exports Ltd. (SLP no. 21349/2007 arising out of ITA no. 880/2006 of the High Court of Delhi). Following the aforesaid decision of the Apex Court in CIT v. Lovely Exports (P) Ltd. (supra), the Hon'ble Mumbai High Court in the recent judgement in the case of CIT v Creative World Telifilms Ltd. (order dated 12.10.2009 in ITA(L) no. 2182 of 2009) has held as under: "The question sought to be raised in the appeal was also raised before the Tribunal and the Tribunal was pleased to follow the judgement of the Apex Court in the case of CIT vs. Lovely Exports (p) Ltd. reported in (2008) 216 CTR 195 (SC) wherein the Apex. Court observed that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the assessing officer, then the department can always proceed against them and if necessary reopen their individual assessments. In the case in hand, it is not disputed that the assessee has given the details of name and address of the shareholders, their PAN/GIR number and had also given the cheque number, name of the bank. It was expected on the part of the assessing officer to make proper investigation and reach the shareholders. The assessing officer did nothing except issuing summons which was ultimately returned back with an endorsement 'not tenable'. In our considered view, the assessing officer ought to have found out their details through PAN Card, Bank Account details or from their bankers so as to reach the shareholders since al/ the relevant material details and particulars were given by the assessee to the assessing officer. In the above circumstances, the view taken by the Tribunal cannot be faulted. No substantial question of law is involved in the appeal. In the result, the appeal is dismissed in limine with no order as to costs.”

Similar decision has also been taken by the Hon'ble Chhattisgarh High Court in ACIT v. Venkateshwar Ispat Pvt. Ltd. (2009) 319 ITR 393. 4.3.8. Further, the Hon'ble Delhi High Court relying on the judgement of the Apex Court in Lovely Exports Pvt. Ltd. (supra) has dismissed the department's appeals in limine vide its recent orders in the case of CIT v. Dwarkadhish Investment Pvt. Ltd. and Dwarkadhish Capital Pvt. Ltd (ITA nos. 911/2010 and 913/2010 order dated 02.08.2010), CIT v. Green Tech Tower Builders Pvt. Ltd. (ITA no. 1113/2010 order dated 12.08.2010) and CIT v. Ultratech Finance & Investment Ltd. (ITA no. 1122/2010 order dated 12.08.2010). In the case of Dwarkadhish Investment Pvt. Ltd. and Dwarakdhish Capital Pvt. Ltd. (supra) the Hon'ble jurisdictional High Court vide its common order dated 02.08.2010 has interalia observed as under:

"7. Consequently, the doctrine of merger would apply and the judgment of the Supreme Court in Lovely Exports (P) Ltd. (supra) would cover the field with regard to interpretation of Section 68 of Act, 1961.

8. In any matter, the onus of proof is not a static one. Though in Section 68 proceedings, the initial burden of proof lies on the assessee yet once he proves the identity of the creditors/share applicants by either furnishing their PAN number or income tax assessment number and shows the genuineness of transaction by showing money in his books either by account payee cheque or by draft or by any other mode, then the onus of proof would shift to the Revenue. Just because the creditors/share applicants could not be found at the address given, it would not give the Revenue the right to invoke Section 68. One must not lose sight of the fact that it is the Revenue which has all the power and wherewithal to trace any person. Moreover, it is settled law that the assessee need not to prove the "source of source". …….. 10. We are also informed that a Special Leave Petition against the aforesaid Division Bench judgment in the case of the respondent- assessee has been dismissed by the Supreme Court. Accordingly, we are of the opinion that no question of law arises in the present cases as the matter is fully covered by the judgment of the Supreme Court in Lovely Exports (P) Ltd. (supra) as well as the Division Bench judgment of this Court in the case of the respondent-assessee itself.

He further submitted that the AO made additions based on doubt, suspicion, conjecture and surmises; and the AO failed to bring any material on record that the contention of the assessee is false. He submitted that the assessee and the persons to whom summons were issued have furnished sufficient details / documents to prove the existence, identity, creditworthiness and genuineness of ROC records, Income tax particulars of the share applicants and their bank statements, their audited financial statements and evidence regarding issue of shares to the share applicants. He submitted that assessee had received share application money through proper banking channel. However, the AO failed to appreciate the explanation and documents submitted before him during the course of assessment proceedings. He submitted that the said explanation and documents furnished are part of the assessment records and also placed before the ld. CIT (A). As regards decline to provide information of Investigation Wing, the ld. AR submitted that the AO failed to provide the copy of information received from DIT (Investigation). The ld. AR further submitted that in the remand proceedings also, the AO was not able to adduce any evidence on record that the contentions of the assessee are false. He also pointed out that it is well settled law that non-appearance of persons to whom summons u/s 131 of the Act were issued, does not make the assessee liable to produce such parties. He submitted that the assessee did not have the legal power to enforce the attendance, as such, he could not be called upon to do something which was beyond his power and any adverse inference drawn on the basis of such failure of the assessee, could not be sustained. Accordingly, he pleaded to uphold the order of the ld. CIT (A).

object of carrying out business of real estate and infrastructure development.

This is the first year of operation of the assessee and according to the assessee, it has not commenced the business of real estate. The assessee received share capital including share premium aggregating to Rs.4.20 crores during the assessment year which was either invested in bank deposits or used for giving loans and it earned interest income thereon during the financial year under consideration. The assessee had issued 4,20,000 equity shares of Rs.10 each at a premium of Rs.90/- each to 23 companies incorporated under the provisions of Companies Act, 1956 which has been duly reflected in the audited financial statements for the year ended on 31.03.2007. The AO, during the scrutiny, asked the assessee to furnish details of shares aggregating to 4,20,000 issued to authorized persons along with the evidences regarding existence, identity, creditworthiness and genuineness of the transaction entered with the said shareholders. As per the AO, the assessee furnished list of shareholders along with their names, addresses, PAN, shares allotted and amount received vide replies dated 16.11.2009 and 08.12.2009. The AO notes that out of the 23 shareholders, 4 parties from this list figures in the information on accommodation entries received from the Directorate of Income-tax (Investigation), New Delhi and they were M/s. Archit Fincap Limited Rs.9 lakhs, M/s. At All Time Your Securities Ltd. Rs.42,40,000/-, M/s. Focus Industrial Resources Limited Rs.6,60,000/- and M/s. Paras Fincap Pvt. Ltd. Rs.12 lakhs, thus totaling amount to Rs.70 lakhs. Thereafter, we find that the AO asked the assessee to prove the identity, creditworthiness and genuineness of the aforesaid 4 parties and issued summons u/s 131 of the Act to the aforesaid four companies. The AO admits that written submissions enclosing the confirmation of the 4 parties and statement of bank account were received by post from the above shareholders. The AO, however, was not satisfied because none appeared personally before him and no documentary evidence evidencing source of fund were furnished before him. Therefore, because of non-appearance of 4 parties and the source of their fund in the bank accounts, the AO was of the opinion that the assessee failed to prove identity, creditworthiness and genuineness of the transactions. During the appellate proceedings, the assessee brought to the notice of the CIT (A) that based on some report of the Investigation Wing, the AO had prejudiced mind against the four companies who had a shareholding of Rs.70 lakhs and did not provide the assessee the copy of the information which was used against it without affording an opportunity to rebut/cross examine vitiates the entire addition. The CIT (A) sought remand report of the AO wherein the AO accepted that he has substantially relied upon the informational inputs provided by the Investigation Wing, New Delhi for those four parties; and we find that the assessee in order to prove the identity, creditworthiness and genuineness of the 4 parties had submitted confirmation ROC documents, Income-tax returns, particulars of the share applicants and their banks statements, their audited financial statements and evidence regarding issue of shares to the share applicants. We find that in AO has failed to bring any material on record that would suggest that these documents were false or fabricated. The AO by heavily relying on the investigation wing report has simply made an opinion because the 4 parties did not turn up in front of him and could not substantiate its source of source, so he disbelieved them which cannot sustain in the eyes of law. The CIT (A) has made a finding that the amount totaling Rs.70 lakhs was received from 4 parties/companies from account payee cheques/demand drafts. We take note that the AO has accepted the share application money/premium amount received from 19 parties and only doubted 4 parties on the basis of the information from the Investigation Wing. We take note that the summons issued u/s 131 of the Act to the aforesaid 4 parties were duly served upon them at the addresses provided by the assessee and replies were filed by the said 4 parties along with necessary documents before the AO including the confirmations and their bank statements. The AO in his remand report has admitted that he has heavily relied on the inputs of investigation wing which piece of evidence was not admittedly given to the assessee during the time of the assessment proceedings which amounts to violation of natural justice. If the AO was heavily relying on the Investigation Wing Report then he was duty- bound to have provided a copy of the same to the assessee so that he can rebut or bring evidences to prove his case. When out of 23 shareholders 19 shareholders’ identity, creditworthiness and genuineness were proved with the same set of documents, taking out 4 parties to make an addition of Rs.70 lakhs

Rs.4.20 crores has been made u/s 68 of the Act cannot be sustained. The CIT (A) has also rightly taken note that no adverse comments were made by the AO on the merit of the case and did not cast any finding that whether the documents furnished by the assessee to prove identity, creditworthiness and genuineness of the 4 shareholders were bogus or fabricated. In the light of the above, we find that the ld. CIT (A) has rightly discussed a number of judicial precedents to delete the addition made by the AO. So, therefore, we do not find any infirmity in the order passed by the ld. CIT (A) and, therefore, we dismiss the appeal of the revenue.