TMI Blog2008 (1) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... ross objection, the Revenue has raised following ground: "On the facts and in the circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) has erred in deleting the disallowance of Rs. 46,07,000 being share capital relying on the case law of CIT v. Steller Investment Ltd. [2001] 251 ITR 263 (SC), whereas the assessee had failed to prove the identity as well as the creditworthiness of the companies/parties who had invested in share capital of the assessee-company." Briefly stated, the facts relating to the issue involved in the grounds of appeal of the assessee and that of the cross objection are that in this case original assessment under section 143(3) of the Act was completed on March 30, 1998, on an income of Rs. 2,25,01,415 as against a returned loss of Rs. 55,585 by making an addition of Rs. 2,25,57,000 on account of share capital and share application money. On appeal, this order was set-aside by the learned Commissioner of Income-tax (Appeals) to be framed de novo vide his order dated December 28, 1998, in Appeal No. 29/98-99. Accordingly, the Assessing Officer in order to comply with the directions of the Commissioner of Income-tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment. However, for example, it may be mentioned that the assessee has claimed investment of Rs. 93,50,000 by M/s. Alwar Finlease Pvt. Ltd. and Rs. 1,32,00,000 by M/s. Mehar Capital Finance Pvt. Ltd. but on enquiry these companies were found to be non genuine companies and the bank account of the alleged share applicants was being maintained and manipulated by Shri Sandeep Thapar, who is a director in this very company. Since the facts and merits of the case have already been discussed in detail in the assessment order and also thrashed out by the Commissioner of Income-tax (Appeals) who has called for copy of the account opening form and bank account of the alleged creditors which show that the creditors are non genuine and coupled with the fact that the assessee-company has not cared to comply with the provisions of the notices issued from time to time. It is patently clear that the assessee has no fresh explanation to offer to explain the genuineness of the liability as appearing in the books of account." Aggrieved with the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) and contended before him that the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er company, only on the grounds that one Mr. Sandeep Thapar was signatory in their companies, i.e., Gold Leaf Capital Corporation (India) Ltd., Alwar Finlease (P) Ltd., and Mehar Capital Finance (P) Ltd." After considering the submissions, the learned Commissioner of Income-tax (Appeals) allowed a part of relief to the assessee by simply confirming the addition of Rs. 1,79,50,000 and deleting the balance addition made by the Assessing Officer as under: "I have carefully considered the matter. It is very clear that the onus under section 68 of proving the genuineness of the transaction, the creditworthiness of the creditor and the actual identity of the creditor has not been discharged by the assessee-company. The Commissioner of Income-tax (Appeals)-I, comments given in his order dated December 28, 1998, which have been reproduced above, clearly show that the true state of affairs had to be established after analysing the inter-company transactions and the antecedents of these persons involved, including Sh. Sandeep Thapar. On one pretext or the other, the assessee has avoided meeting these requirements in the assessment proceedings and also before the undersigned. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nducted by the Assessing Officer in a case of investment in the share capital of a company in the case of private limited company/private placement to probe the identity, creditworthiness and the genuineness of the transaction because in this case their Lordships have arrived at the conclusion by critically analysing all the earlier decisions in this regard delivered by the High Court, including the decision in the case of Sofia Finance Ltd. [1994] 205 ITR 98. The relevant portions of the decision in the case of Divine Leasing and Finance Ltd. [2008] 299 ITR 268 (Delhi) are reproduced herein under: "14. On appeal this court held that: '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 a public issue, the company concerned cannot be expected to know every detail pertaining to the identity as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enerally to all cases, irrespective of the nature of receipts because in the case of share investments for public placements the degree of proof may be light but in the case of private placement it may be stringent, the reason being a public issue cannot be made by a private limited company. However with requisite permission the share capital can be received through private placement normally to known persons/companies. Similar would be the position when the shares are allotted by a public limited company on private placement basis. With this understanding of law regarding additions made under section 68 of the Act, as laid down through various case laws, we now proceed to determine the issue under consideration before us arising from the orders of the tax authorities below, i.e., the genuineness of the share capital/share application money introduced by the assessee during the assessment year 1995-96, under consideration. Before proceeding further, it is important to understand the background of the case as well as the role played by the assessee in providing co-operation to the Assessing Officer in completion of original assessment and the set-aside assessment, as well as, the ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablishing with cogent evidence the creditworthiness of the investing companies and the genuineness of the transaction involved in the investment of share capital of the assessee because the Assessing Officer was compelled to simply draw adverse inference against the assessee on account of the non-cooperation, though, of course, which he rightly and legally did so. This is part of the story up to the completion of the initial assessment by which we have simply tried to reveal the conduct and role played by the assessee. Before the Commissioner of Income-tax (Appeals) during the first innings of the appellate proceedings we find that the assessee furnished for the first time the bank statement of the assessee-company, copies of the returns filed by the shareholder companies and confirmations etc. The Commissioner of Income-tax (Appeals) thereafter also collected some vital information regarding the investing companies, obtained copies of their bank accounts, bank account opening documents and then directed the Assessing Officer to frame the assessment de novo by making the following observation: "Quite interesting, one person, Sandeep Thapar, figures in the account opening form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N Number if they are assessed to tax, nature and source of share capital, share application money, pending allotment, current liabilities, list of shareholders and their complete addresses from which the investments have been received, mode of receipt of payment if received through bank the number of the cheques/drafts, to prove the identity and capacity of creditors/shareholders/share applicants along with documentary evidence in support thereof and, lastly, to prove the genuineness of the transaction. The assessee except insisting that the earlier replies in response to the query of the Assessing Officer furnished by the assessee along with other details would cover all the present queries and information called for by the Assessing Officer in the second innings of the assessment did not furnish any other details called for by the Assessing Officer and the books of account called for by the Assessing Officer. The assessee also did not produce its director, Shri Sandeep Thapar, who figured in all the account opening forms of the assessee-company and the other two investing companies, though directed to do so by the Commissioner of Income-tax (Appeals) for helping in investing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and Finance Pvt. Ltd., copy of statement of Oriental Bank of Commerce in the case of the assessee-company, as well as, in the case of shareholder companies and copies of confirmation from investing companies M/s. Alwar Finlease Pvt. Ltd. And M/s. Mehar Capital and Finance Pvt. Ltd. Similarly, flow of funds chart starting from Thapar Milk Product Ltd. back to Thapar Milk Product Ltd., as shown at pages 116 to 118 of the paper book filed before the Tribunal, indicating investments was filed for the first time before the Commissioner of Income-tax (Appeals). These facts get further confirmed from the order of the Commissioner of Income-tax (Appeals) indicating the filing of these documents by the assessee during the course of appellate proceedings before the Commissioner of Income-tax (Appeals). All this is again indicative of the fact that in fact the assessee from day one of initiation of initial assessment proceedings was in a position to exercise control on the investing companies and still it withheld all the necessary information called for by the Assessing Officer, which could enable the Assessing Officer to test the genuineness of the transaction and creditworthiness of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee would be deemed to be the income of the assessee under section 68 of the Act and the addition could be made accordingly. The importance of the genuineness of transaction has been laid down by the jurisdictional High Court in the case of Divine Leasing and Finance Ltd. [2008] 299 ITR 268 (Delhi) wherein their Lordships observed in the following words the importance of genuineness of transaction in the case of private placement: "In the case of private placement the legal regime would not be the same. A delicate balance must be maintained while walking the tight rope of sections 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." It is here where the assessee played Significant role by putting hurdles by not providing the details/documents called for by the Assessing Officer a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his was not only quite unusual but also quite unnatural. It was incredible that a complete stranger would want to gift lakhs of rupees to a person only because that person wanted the amount for purchasing a house. The taxing authorities were entitled to look into the surrounding circumstances, which they did, and come to the conclusion that the gifts could not be said to be genuine. The reason offered by the assessee did not appear to be reasonable, much less acceptable. Therefore, there was no error in the view taken by the Tribunal. Similarly, their Lordships of the apex court in the case of CIT v. P. Mohanakala [2007] 291 ITR 278, had an occasion to decide the following question relating to gifts: "Whether in the facts and circumstances, the Income-tax Appellate Tribunal was correct in law to accept the principle of preponderance of probabilities in holding that the claim of the appellant that the sum of Rs. 15,62,500 received him by way of gifts through normal banking channels was not genuine and that it was liable to be assessed under section 68 of the Income-tax Act, 1961?" In this case, the Assessing Officer in his order while taking into consideration the statements o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordships while upholding the order of the Tribunal in the case of Rajeev Tandon [2007] 294 ITR (AT) 291 (Delhi) have also held that the tax authorities below while considering the genuineness of the gift transactions were entitled to look into the surrounding circumstances, which they did and came to the conclusions that the gifts could not be said to be genuine and, therefore, there was no error in the view taken by the Tribunal. In view of our detailed discussion hereinabove, we have come to a conclusion that in the instant case the assessee intentionally did not produce Shri Sandeep Thapar, the director, before the Assessing Officer, as directed by the Commissioner of Income-tax (Appeals) in the appellate order of the first innings of the proceedings so that the true state of affairs of inter-company transactions i.e. between the assessee-company and the investing companies could be investigated by the Assessing Officer for coming to a conclusion regarding the genuineness of the transactions and credit-worthiness of the investors. Again for this very purpose the assessee also intentionally did not produce the documents or provide information called for by the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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