Full Text
HIGH COURT OF DELHI
ITA 409/2012
Through Mr. Sanjeev Sabharwal, Sr. Standing Counsel
Through Mr. Salil Kapoor with Mr. Sanat Kapoor, Mr. Vikas Jain and
Ms. Sugandha Anand, Advs.
HON'BLE MR. JUSTICE SANJEEV SACHDEVA SANJIV KHANNA, J.
This appeal by the Revenue which relates to assessment year
2006-07 stands for adjudication on the following question:
“Whether the impugned order of the Income
Tax Tribunal (ITAT) is an error of law in approving the deletion of the amount included by the assessing officer by applying Section 68 of the Income Tax Act, 1961, in the facts and circumstances of the case?”
JUDGMENT
2. Commissioner of Income Tax (Appeals) and the tribunal have held that the respondent assessee has been able to discharge onus under Section 68 of the Act as the respondent assessee had filed 2013:DHC:6357-DB names and addresses of share applicants, PAN number details, confirmation letters, their income tax returns, copies of bank statements of share applicants from the account from which investments were made, copy of share application form and copy of audited balance sheet of the share applicants. It has been accordingly held that the identity, creditworthiness of the shareholders and genuineness of the transactions has been established. Reference and reliance was placed on judgments of Delhi High Court in CIT vs. Stellar Investment Ltd. [1991] 192 ITR 287, Monnet Ispat and Energy Ltd. vs. DCIT (2008) 171 Taxman 27, CIT vs. Divine Leasing and Finance Ltd. (2007) and CIT vs. Lovely Exports Pvt. Ltd. both reported (2008) 299 ITR 268. Some other decisions have also been referred to in the order of the Commissioner of Income Tax (Appeals) (CIT (A) for short).
3. For the sake of convenience, we are reproducing below the observations made by the Tribunal in their order dated 4th November, 2011 dismissing the appeal of the Revenue. The relevant paragraph reads as under:
4. It is an undisputed position that during the assessment year in question, the respondent assessee had received Rs.51,10,000/- from six different companies as per details given below:
5. These six companies had paid Rs.9,22,000/- @ Rs.10/- per share towards face value of the share and Rs.41,88,000/- @ Rs.40/per share as share premium to accordingly make a total sum of Rs.51,10,000/-. This factual position is not disputed.
6. Before us relying upon the order of the Assessing Officer, it was submitted by the respondent assessee that there was no corresponding credit entry in the bank account of M/s Inter Steller Exports Pvt. Ltd. as the assessment order mentions that there were debit entries of Rs.4,23,000/- and Rs.5,15,000/- on 27th May, 2005 before a sum of Rs.9,35,000/- was transferred to the respondent assessee‟s account. The word „debit‟, it is apparent, is a typographical error in the order of the Assessing Officer. Paragraph 3 of the impugned order passed by the tribunal which records the submission made by the Departmental Representative, reads:-
7. In paragraph 4 of the impugned order quoted above, it is recorded by the Tribunal that there were matching credit entries in Inter Steller Exports Pvt. Ltd, Sober Associates Pvt. Ltd. and Ritika Finance & Investments Pvt. Ltd. Thus, it can be savely construed that as per the bank statements of Inter Steller Exports Ltd., Sober Associates Pvt. Ltd and Ritika Finance & Investments Pvt. Ltd., there were corresponding or substantial deposits and credit entries before the investments were made towards share capital. This is the factual position, not commented upon by the tribunal.
8. It is also accepted as true and correct that the respondent assessee had not charged premium in the immediately previous year from the share subscribers. This factual position is recorded and mentioned in the order of the Tribunal. Further, the shareholder companies had not filed the relevant schedule of the balance sheet relating to details of investments made by them. It is noticeable that for the assessment year in question, the respondent assessee had filed a return declaring income of Rs.71,910/-. The respondent assessee was carrying on business of trading in shares and derivatives besides which they had earned interest income of Rs.23,533/- and dividend income of Rs.21,550/-. The assessment order records that M/s Parivartan Capital and Financial Services Pvt. Ltd. was controlled by Shri Hari Om Bansal and M/s Sober Associates Pvt. Ltd. and M/s Shri Niwas Leasing & Finance Ltd. were controlled by Shri Mahesh Garg, who in their statements before Director of Income Tax (Investigations) had admitted that they were engaged in the business of providing accommodation entry through various companies controlled by them.
9. The short issue in question is raised whether the tribunal was right in holding that the respondent assessee had discharged the onus in establishing the identity of the shareholders, their creditworthiness and genuineness of the transactions. We have quoted the reasoning given by the tribunal which is recorded and elucidated in only one paragraph i.e. paragraph 4 of the impugned order. Tribunal on the basis of the judgment in the case of Lovely Exports Pvt. Ltd. (supra) has held that the assessee was not required to produce any further material, than establishing the name, identity by way of address, PAN details, and copies of confirmation, income tax return, bank statements, share application and balance sheet. Thereafter, if any doubt persisted, the action lied in the case of the contributors i.e., the share applicants.
10. We had the occasion to deal with a similar controversy and issue in our recent decision dated 22nd November, 2013 passed in ITA No. 1018/2011 and 1019/2011 titled CIT vs. N.R. Portfolio Pvt. Ltd. In the said decision we referred to the decisions of Delhi High Court in Lovely Exports Pvt. Ltd. (supra) and Divine Leasing & Finance Ltd. (supra) and observed as under: “18. In the remand report, the Assessing Officer referred to the provisions of Section 68 of the Act and their applicability. The word “identity” as defined, it was observed meant the condition or fact of a person or thing being that specified unique person or thing. The identification of the person would include the place of work, the staff, the fact that it was actually carrying on business and recognition of the said company in the eyes of public. Merely producing PAN number or assessment particulars did not establish the identity of the person. The actual and true identity of the person or a company was the business undertaken by them. This according to us is the correct and true legal position, as identity, creditworthiness and genuineness have to be established. PAN numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertaining active nature of business activity. PAN is a number which is allotted and helps the Revenue keep track of the transactions. PAN number is relevant but cannot be blindly and without considering surrounding circumstances treated as sufficient to discharge the onus, even when payment is through bank account.
19. On the question of creditworthiness and genuineness, it was highlighted that the money no doubt was received through banking channels, but did not reflect actual genuine business activity. The share subscribers did not have their own profit making apparatus and were not involved in business activity. They merely rotated money, which was coming through the bank accounts, which means deposits by way of cash and issue of cheques. The bank accounts, therefore, did not reflect their creditworthiness or even genuineness of the transaction. The beneficiaries, including the respondent-assessee, did not give any share-dividend or interest to the said entry operators/subscribers. The profit motive normal in case of investment, was entirely absent. In the present case, no profit or dividend was declared on the shares. Any person, who would invest money or give loan would certainly seek return or income as consideration. These facts are not adverted to and as noticed below are true and correct. They are undoubtedly relevant and material facts for ascertaining creditworthiness and genuineness of the transactions.” On the question of „source of source‟ and „origin of origin‟, it was elucidated:
With reference to two decisions, it was further held
26. Thereafter reference was made to Full Bench decision in the case of Sophia Finance Ltd.’s case (supra) wherein it has been observed that if the shareholders exists then, “possibly”, no further enquiry needs to be made and that the Full Bench had not reflected upon the question of whether the burden of proof rested entirely on the assessee and at which point this burden justifiably shifted to the assessing officer. The Full Bench has observed that they were not deciding as to on whom and to what extent was the onus to show that the amount credited in the books of accounts was share capital and when the onus was discharged, was not decided. The standard of proof might be rigorous and stringent and was dependent upon nature of the transaction and where there was evidence that the source of investment cannot be manipulated, it was material. Similarly, it was observed that assessee could scarcely be heard to say that he did not know the particulars of a donor in case of a gift. It was held:- “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 Revenues‟s insistence that it should prove the negative. In the case of a public issue, the Company concerned cannot be expected to know every detail 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 AO 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………………… xxxx ……….Once material to prove these ingredients are produced it is for the Assessing Officer to find out as to whether, on these materials, the assessed has succeeded in establishing the ingredients mentioned above. The Assessing Officer `lift the veil‟ and enquire into the real nature of the transaction. C.I.T. v. Ruby Traders and Exporters Ltd.: [2003]263ITR300(Cal), C.I.T. v. Nivedan Vanijya Niyojan Ltd. [2003]263ITR623(Cal) and C.I.T. v. Kundan Investment Ltd. [2003]263ITR626(Cal.) are the other three. In this analysis, a distillation of the precedents yields the following propositions of law in the context of Section 68 of the IT 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 creditworthiness or financial strength of the creditor/subscriber. (4) If relevant details of the address or 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 assessed. (5) The Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices; (6) the onus would not stand discharged if the creditor/subscriber denies or repudiates 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; and (7) The Assessing Officer is duty-bound to investigate the creditworthiness of the creditor/ subscriber the genuineness of the transaction and the veracity of the repudiation.” Decision in the case of Lovely Exports Pvt. Ltd. (supra) was also considered in CIT vs. Nova Promoters & Finlease (P) Ltd. [2012] 342 ITR 169 (Del.) and it was explained:
11. The respondent assessee is a private limited company. It is not the case of the respondent that their Directors or persons behind the companies, who had purportedly made investment in the shares were related or known to them. In the present case substantial investment has been made in a private limited company which includes share premium @ Rs.40/- per share amounting to Rs.41,88,000/-. It is not a case of the respondent assessee that they had a proven good past track record justifying a hefty premium, four times the face value. What was placed on record were certain papers which showed that the respondent assessee had taken care to ensure legal compliances. The said evidence is primarily documentary evidence. But, what the tribunal has noticed but not given due credence to are the surrounding circumstances which include a huge premium i.e. four times of the face value of the shares, credit entries in the bank accounts before transfer of money to the assessee, failure of the companies to file details of the inventories and the fact that the assessee company had not charged any premium earlier. Identity, creditworthiness of the shareholders and genuineness of the transaction in all cases is not established by only showing that the transaction was through banking channels or account payee instrument. It would be incorrect to state that the onus to prove genuineness of the transaction and creditworthiness of the creditor stands discharged in all cases if payment is made through banking channels. Surrounding and corroborative factual details are equally important and may justify further proof or details before it is held that onus is discharged. As held in N.R. Portfolio (supra) the question of discharge of onus depends upon whether the two parties are related or known to each other, the manner in which the parties approached each other, whether the transaction was entered into through written documents to protect the investment, whether the investor professes and was an angel investor, the quantum of money, creditworthiness of the recipient, the object and purpose for which payment was made etc. These facts are primarily in knowledge of the assessee and it is difficult for revenue to prove and establish the negative. Thus, mere reliance on neutral documentary evidence cannot always be regarded as satisfactory discharge of onus.
12. Investment decisions, that too of investing in share capital at a premium in a private limited company, in the normal circumstances, unless there are other peculiar or personal reasons, entails due diligence by both the share applicant and the recipient company. This implies inquiry and verification by the persons behind the artificial entity. There have been a spate of cases where private limited companies have purportedly received share application money from unconcerned, unrelated parties without securing adequate protection of their investment and with other surrounding circumstances clearly indicative of racket or a scam. We reproduce a portion the ruling in Onkar Nath v. Delhi Administration, AIR 1977 SC 1108, wherein it was stated: “6…………………The list of facts mentioned in Section 57 of which the Court can take judicial notice is not exhaustive and indeed the purpose of the section is to provide that the Court shall take judicial notice of certain facts rather than exhaust the category of facts of which the Court may in appropriate cases take judicial notice. Recognition of facts without formal proof is a matter of expediency and no one has ever questioned the need and wisdom of accepting the existence of matters which are unquestionably within public knowledge……….. ………….No Court therefore insists on formal proof, by evidence, of notorious facts of history, past or present. The date of poll, passing away of a man of eminence and events that have rocked the nation need no proof and are judicially noticed. Judicial notice, in such matters, takes the place of proof and is of equal force. In fact, as a means of establishing notorious and widely known facts it is superior to formal means of proof……………”
13. It is important, to segregate cases of bonafide or genuine investments by third persons in a private limited company, from cases where receipt of share application money is only a facade for conversion of unaccounted for money or money laundering. The said question cannot be decided without taking notice of the surrounding facts and circumstances, by merely relying upon paper work which at best in some cases would be a neutral factor. The paper work though important may not be always conclusive or determinative of the final outcome or finding whether the transaction was genuine. When and under what circumstances onus is discharged, as held in N.R. Portfolio (supra), cannot be put in a strait jacket universal formula. It will depend upon several relevant factors. Cumulative effect has to be ascertained and understood before forming any objective opinion whether or not onus has been discharged by the assessee. Of course suspicion or doubts may not be sufficient and care and caution has to be taken that the assessee has limitations but this cannot be a ground to ignore contrary incriminating evidence or material which when confronted, meets silence or no answer.
14. Learned counsel for the appellant has relied upon decision dated 22nd November, 2012 in ITA No. 232/2012 titled Commissioner of Income Tax – IV vs. Fair Finvest Ltd. But the said decision is distinguishable as the assessee had filed affidavits of the present Directors of the share applicant companies affirming the payment made and the fact that the shares were allotted.
15. Similarly reference to CIT vs. Gangeshwari Metal (P) Ltd. [2013] 30 Taxmann.com 328 (Delhi) is inappropriate as in the said case decision in Nova Finlease Pvt. Ltd (supra) was distinguished on facts, observing that the Assessing Officer had failed to conduct any enquiry and had proceeded with folded hands as if it was for the assessee to produce all evidence and material.
16. In ITA No. 212/2012 titled CIT vs. Goel Sons Golden Estate Pvt. Ltd., appeal of the Revenue was dismissed holding that the Assessing Officer had failed to make necessary enquiry at the time of the assessment proceedings. It was specifically observed that the factual findings recorded by the Assessing Officer were incomplete and sparse. In the present case, we find that the Assessing Officer had conducted enquiries and made a reference to the surrounding facts i.e. deposits/credit of the amounts in the bank account of the share applicants; substantial amount of Rs.41,88,000/- paid as premium and referred to the fact that only one Shri R.C. Verma, CA and Power of Attorney holder of M/s Ritika Finance & Investment Pvt. Ltd. had appeared alongwith Shri Dinesh Kumar, the AR of the assessee company during the assessment proceedings and filed the bank statement and copy of the balance sheet but, failed to file schedule of investments made by the said company. Others had failed to appear.
17. Learned counsel for the assessee during the course of hearing had drawn our attention to the order of the CIT (Appeals), wherein he had recorded that the assessing officer had neither conducted any enquiries from the concerned parties nor did he examine the assessment records of the share applicants and despite the request of the assessee, he did not issue summons under Section 131. Our attention was also drawn to the contentions recorded by the CIT (Appeals) that the assessee in their reply dated 12th December, 2008 had made a specific request to the assessing officer to summon the shareholders. This aspect has been dealt with in the case of N.R. Portfolio (supra) as well as Nipun Builders and Developers (supra). However, we refrain from stating or going into further details or matrix, as we find that the tribunal has not adverted to the said fact in affirmative or negative, in the impugned order dated 4th November,
2011. We find that the assessing officer in the assessment order has not mentioned or recorded that the assessee had made any request for summoning of the shareholders or their Directors or principal officers. Whether any such request was made and if it was made whether it amounts to lapse on the part of the Assessing Officer, why and for what reasons the assessee was not able to produce principal officer or Director of shareholder companies etc. are all aspects which were required to be gone into by the Tribunal in detail. In the given case, an order of remand/remand report or additional evidence may be justified or proper. In these circumstances, we feel that it will be appropriate and proper to pass an order of remit to the tribunal for fresh decision wherein the entire issue will be dealt with afresh without being influenced by the earlier order dated 4th November,
2011.
18. The tribunal will also take into account facts and circumstances noted above but the observations made in this order will not be treated as conclusive and final.
19. Accordingly, we have answered the question of law in favour of the appellant Revenue and against the respondent assessee but with order of remand to the tribunal for fresh decision. To cut delay, parties will appear before the tribunal on 15th January, 2014, when a date of hearing will be fixed. The appeal is accordingly disposed of. No Costs.
(SANJIV KHANNA) JUDGE (SANJEEV SACHDEVA) JUDGE December 10th, 2013 kkb