TMI Blog2011 (10) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies were not available at the given addresses. It is not possible that the companies making huge investment in the form of share application are not found at the given addresses. There is a possibility that there may be a change of address but till the stage of the Tribunal no such address was furnished by the assessee, therefore the onus was not discharged as the assessee neither furnished the correct addresses nor the creditors were produced rather the assessee tried to stall the assessment proceedings by giving misleading facts and incorrect addresses - Decided against the assessee Dis-allowance of telephone expenses - Held that:- No reason has been assigned for making such ad hoc disallowance by the AO and secondly that since the company is a juristic person, no disallowance of personal nature can be made in the case of a company - Decided in favor of assessee - IT Appeal Nos. 136, 137, 151, 190 & 196 (Ind.) of 2009 and 34, 158, 193 & 283 (Ind.) of 2010 - - - Dated:- 31-10-2011 - JOGINDER SINGH, R.C. SHARMA, JJ. P.M. Chaudhary, Ajay Tulsiyan and Hitesh Chimnani for the Appellant. Keshave Saxena, R.K. Choudhary and K.K. Singh for the Respondent. ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant on the unsecured loans, on the facts and in the circumstances of the case is allowable to the appellant. It is therefore prayed that the said addition requires to be now deleted. 3. That the learned CIT(A) erred in upholding the ad hoc disallowance made by the Assessing Officer of Rs. 80,000/- on account of telephone expenses for alleged personal use which on the facts and in the circumstances of the case is wrong and uncalled for. It is, therefore, prayed that the said addition requires to be now deleted." ITA No. 34/Ind/2010 "That the learned CIT(A) erred in upholding the disallowance made by the Assessing Officer of Rs. 8,92,890/- paid as interest on unsecured loans. That the said interest expenditure having properly incurred by the appellant on the unsecured loans on the facts and in the circumstances of the case is allowable to the appellant." ITA No. 190/Ind/2009 1. That the learned CIT(A) erred in confirming the addition of Rs. 5,00,000/- made by the A.O. as alleged unexplained credit u/s 68. It is submitted that the said unsecured loan received from M/s Optimates Textile Industries Ltd. was properly explained and on the facts and in the circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made u/s 69C of interest of Rs. 54257/- paid on unsecured loan from M/s Optimates Textiles Industries Ltd. That, on the facts and in the circumstances of the case the levy of penalty is wrong. ITA No. 137/Ind/2010 1. That the learned CIT(A) erred in upholding addition made by the Assessing Officer of unsecured loan of Rs. 20,00,000/- received from M/s Hindustan Continental Ltd. as unexplained cash credits u/s 68 of the Income Tax Act, 1961. That on the facts and in the circumstances of the case, the said unsecured loan was properly explained and the addition is wrong and unjustified. It is, therefore, prayed that the said addition now requires to be deleted. 2. That the learned CIT(A) erred in upholding an addition made by the Assessing Officer u/s 69C of Rs. 1,61,096/- being interest paid, as unexplained expenditure which on the facts and in the circumstances of the case is wrong and uncalled for and the same requires to be now deleted. 2. During hearing of these appeals, we have heard Shri P.M. Chaudhary and Shri Ajay Tulsiyan, the learned counsels for the assessee and S/Shri Keshav Saxena, Shri R.K. Chaudhary, Shri K.K. Singh, learned Commissioners of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmation, copy of bank account and acknowledgement of return. It has also furnished various decision in support of its contentions. But it is evident from the investigation made by ACIT 5(1), Indore that both these company are not existing companies in the real sense. These companies are paper companies only and exist nowhere and were used to give accommodation entries to various parties who want to launder their unaccounted money in the guise of share application or unsecured loan or long term capital gain. The assessee is a closely held Pvt. Ltd. Company in which public is not substantially interested. Thus as per section 68 onus was upon the assessee to establish depositor's identity, creditworthiness and genuineness of transaction. Assessee in its written submission stated that company has received share application money of Rs. 40,00,000/- from Hindustan Continental Ltd. 19, Shubh Kamna Apartment, Gul Bazar, Jabalpur. As per the report of the ACIT 5(1), Indore, it is clear that no such company exist at the given address. The creditworthiness of the company has also not been established in view of the fact that there is huge inflow and outflow of fund in the Bank account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital and thus confirmed the addition. 5. Before us, the whole thrust of arguments on behalf of the assessee is that all the ingredients of section 68 were fulfilled by the assessee whereas the crux of arguments on behalf of the revenue is that even the identity of these companies was not established by the assessee and these companies merely exists on papers. It was also contended that the notices issued to these parties at the addresses supplied by the Ld. Counsel for assessee returned unserved with the remark that no such companies ever existed at the given addresses. The Inspector was deputed to know the whereabouts of these companies who also reported that no such companies were in existence at the given address. Before coming to any conclusion, we are reproducing hereunder the relevant provisions of section 68 of the Act which deals with cash credits :- "68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has been carried through banking channels, which prima facie proves the genuineness of the transaction. He submitted that as such the assessee has placed on record the voluminous material towards discharge of its initial burden to prove the identity and capacity of the share holder companies as also the genuineness of the transaction. The Ld. Counsel for assessee invited our attention by claiming that following information and documents discharged its primary burden. "Names and addresses of the share holders along with details of their PAN furnished along with reply dated 7/12/07. A list of fresh share capital received during the year along with names and address of the share holders and PAN again given along with reply dated 17/12/07 on demand from AO. Copies of Board resolution and share application Forms of all share holders including the above two companies also filed along with the reply." The Ld. Counsel for assessee submitted that various documents for above two companies were filed before the Assessing Officer to prove the identity, capacity and genuineness of the transactions but the Assessing Officer has brushed aside the same and merely relying upon the report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two companies. He invited our attention to the decision of Supreme Court in Stellar Investment Ltd ( supra ) being on dismissal of Civil Appeal arising out of the decision of Delhi High Court, which constitutes affirmation of the decision and amounts to the declaration of law. It was canvassed that similarly the order of the Hon'ble Supreme Court, dismissing the SLP in the case of Lovely Exports (P.) Ltd ( supra ), also has a binding effect for which reliance was placed upon following decisions :- 1. Kunhayammed v. State of Kerala [2000] 245 ITR 360/113 Taxman 470 (SC) where their Lordships' have held that if the order refusing special leave to appeal is a speaking order i.e it gives reason for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is declaration of law by Supreme Court within the meaning of Article 141 which will obviously be binding on all courts and Tribunals in India and certainly the parties thereto. Secondly other then declaration of law, whatever is stated in the order are findings recorded by Supreme Court which would be binding on the parties and the courts, Tribunal or authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court in the case of Lovely Exports (P.) Ltd. ( supra ) :- ( i ) ACIT v. Vekateshwar Ispat Pvt Ltd [2010] 14 ITJ 83 (Chhatisgarh). ( ii ) ACIT v. Hitkarni Prakashan Ltd . [2010] 14 ITJ 689 (I.T.A.T., Jabalpur). ( iii ) ACIT v. Shri Kela Prakashan (P.) Ltd. [2010] 14 ITJ 539 (I.T.A.T., Indore) 12. So far as application of section 68 of the Act is concerned, the Ld. Counsel for assessee on the issue of burden of the assessee, submitted that assuming without admitting that the view expressed by the Full Bench of Delhi High Court in case of Sophia Finance Ltd ( supra ) still holds good and the provisions of section 68 are applicable to the credits in respect of share application money/share capital, all that is required to be done is that the assessee is required to prove the existence of the share holders because as held by the Full Bench of the Delhi High Court, if the share holders exists then, possibly no further enquiry needs to be made. He, therefore, submitted that as to the existence of the share holders, of course, the assessee is required to place the primary evidence and discharge the primary burden, for which reliance was placed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d filed subscription Form for each of investors. The said subscription Form contained details, which set out not only the identity of subscriber, but also gave information with respect to their addresses as well as PANs. During scrutiny AO had also asked for and was supplied with a copy of statement of bank account of the subscriber. The payments were made by cheques. In view of this the court held that no addition could be made u/s 68 because assessee has discharged the onus in respect of veracity of the transactions. 5. CIT v. KC Fibers Ltd reported in 187 Taxman 53 (Del), wherein it is held that no material is brought by AO to hold that share holders companies are umbrella company or have any relation with each other and the amount cannot be regarded as undisclosed income of the recipient assessee company. It also held that it is not for the assessee company to probe as to the source. It was for AO to enquire into the affairs of the investor company Their Lordships' have applied the ratio of the decision in case of Lovely Exports Pvt Ltd ( supra ). 6. CIT v. Dolphine Canpack Ltd 283 ITR 190 (Del) share application money - Tribunal while observing details includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat such investment has come from assessee company itself. (decision in case of CIT v. Shri Barkha Synthetics Ltd ( supra ) followed). 12. Without prejudice to above contention based on Lovely Export's case, the Ld. Counsel for assessee submitted that an analysis of all the above judgments thus goes to show that even if the principle laid down by the Hon'ble Delhi High Court in Sophia's case ( supra ) is held as applicable even then the assessee's burden is restricted to establishing the existence of shareholders and once that is established, the assessee is not required to prove anything further." 13. The Ld. Counsel for assessee submitted that as per the principle laid down in the case of Sophia Finance Ltd. ( supra ) the assessee has discharged the onus lay upon it. It was, therefore, submitted by the Ld. Counsel for assessee that even if the principle laid down in the case of Sophia Finance Ltd ( supra ) is to be applied then even in such case also, the assessee is only required to prove the existence of the share holders and the fact that the money has been invested by share holding company and not by the assessee company. It was submitted that since various d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not fictitious. It is not for the assessee to explain further as to how and in what circumstances the third party obtained money or how or why he came to made an advance as loan to the assessee. 2. Addl. CIT v. Bahri Bros. (P.) Ltd [1985] 154 ITR 244/22 Taxman 3 (Pat.) 3. Ashok Pal Daga v. CIT [1996] 220 ITR 452/86 Taxman 355 (MP). 4. CIT v. Real time Marketing (P.) Ltd [2008] 306 ITR 35/173 Taxman 41 (Delhi) 5. CIT v. MetaChem Industries [2000] 245 ITR 160/[2001] 116 Taxman 572 (MP) 6. Nemi Chand Kothari v. CIT [2003] 264 ITR 254/[2004] 36 Taxman 213 (Gauhati) 7. P.K. Sethi v. CIT [2006] 286 ITR 318 (Gauhati) 8. CIT v. Barjatya Children Trust [1997] 225 ITR 640/[1996] 87 Taxman 385 (MP) 9. CIT v. Laul Transport Corporation [2009] 180 Taxman 185 (Punj. Har.) 10. Aravali Trading Co. v. ITO [2010] 187 Taxman 338 (Raj). The Ld. Counsel for assessee further submitted that the learned CIT has merely put the seal of approval without appreciating the legal position in regard to the credits for share application money/share capital. He canvassed that it is important to note that inspite of referring to the evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusion that the creditors were fictitious. He submitted that in the instant case also, the AO has failed to make proper enquiries or rather has not at all made enquiries himself as such, the finding and conclusion about non existence of the companies cannot be sustained and has to be treated as without proper material/evidence. The AO has failed to discharge the onus to disprove the identity, capacity and genuineness. The Ld. Counsel for assessee placed reliance on the following decisions :- 1. ITAT Delhi - Aquatech International Ltd. v. ITO [2009] 27 SOT 69 (Delhi) (URO) 2. ITAT Delhi - ITO v. Nova Promoters Fin Lease (P.) Ltd [2010] 44 DTR 1. 16. Before us, the Ld. Counsel for assessee vehemently argued that even otherwise as held by the ITAT, Indore Bench in the case of Kalani Industries Ltd ( supra ), a Limited company duly incorporated and registered under the Companies Act cannot be said to be an nonexistent company in view of the legal position that the company is a juristic person having separate existence apart from its members under the law. The company has its legal birth under the law on its incorporation and the company's existence can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted that by the Ld. Counsel for assessee that these papers/documents, not being part of record, should not be taken into consideration and the same deserve to be summarily rejected. He submitted that even otherwise the facts and the documents sought to be relied upon by the respondents do not have any bearing on the issue involved in the present case. 19. On the other hand, the learned CIT DR strongly defended the impugned orders by submitting that onus is on the assessee at least to establish the identity of share applicants. The notices/commission sent at 4 places, namely, Indore, Mandsaur, Jabalpur and Mumbai were found to be non-existing, consequently, it was contended that these are merely paper companies claimed to have given huge sums of credit in the form of share capital or loans to large number of assessees and then disappeared in thin air after providing accommodation entries. It was strongly contended by the learned CIT DR that neither correct addresses of creditors were given by the assessee nor the creditors were produced before the Assessing Officer for examination and the assessment proceedings were completely stalled as the facts of such transactions c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the learned CIT DR that the decision in the case of Lovely Exports (P.) Ltd. ( supra ) is not applicable to the facts of the present appeals as the Hon'ble Delhi High Court has clearly differentiated cases of share capital of private limited company from public limited company. It was also submitted that in the decision of Lovely Exports (P.) Ltd. ( supra ) the Hon'ble Apex Court merely dismissed SLP and it is no longer a speaking order as it is neither expression of judicial view nor a binding precedent for which reliance was placed upon the decision in CIT v. Shree ManjuNathesware Packing Products Camphor Works [1998] 231 ITR 53/96 Taxman 1 (SC), Nawab Sir Mir Osman Ali Khan v. CIT [1986] 162 ITR 888/28 Taxman 641 (SC), CIT v. Quality [1997] 224 ITR 77/93 Taxman 222 (Pat.). A strong plea was also raised by the learned CIT DR that many High Courts have distinguished the decision in Lovely Exports (P.) Ltd. ( supra ) because it was merely dismissal of SLP for which our attention was invited to the decision in CIT v. Oasis Hospitalities (P.) Ltd. [2011] 333 ITR 119/198 Taxman 247/9 taxmann.com 179 (Delhi). Reliance was also placed upon the decision in CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cceptable to the department and is being contested before Hon'ble High Court of M.P. assessee has tried to prove genuineness of transaction by furnishing confirmation, copy of bank account and acknowledgement of return. It has also furnished various decision in support of its contentions. But it is evident from the investigation made by ACIT 5(1), Indore that both these company are not existing companies in the real sense. These companies are paper companies only and exist nowhere and were used to give accommodation entries to various parties who want to launder their unaccounted money in the guise of share application or unsecured loan or long term capital gain. The assessee is a closely held Pvt. Ltd. Company in which public is not substantially interested. Thus as per section 68 onus was upon the assessee to establish depositor's identity, creditworthiness and genuineness of transaction. Assessee in its written submission stated that company has received share application money of Rs. 40,00,000/- from Hindustan Continental Ltd. 19, Shubh Kamna Apartment, Gul Bazar, Jabalpur. As per the report of the ACIT 5(1), Indore, it is clear that no such company exist at the given address ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is a listed company on stock exchange and the Assessing Officer was in knowledge and possession of the income tax return of the company. Our attention was invited to the details of "capital work in progress" and licence capacity of HCL Limited by arguing that the existence and credit worthiness of HCL is established since it is having share capital of Rs. 8.09 crores. During hearing before us, the Ld. Counsel for assessee Mr. Choudhary, invited our attention to deposit of cash in bank account of M/s Sahayata Marketing and transfer thereof through account payee cheque to the bank account of M/s Sunil Shares Stocks Private Limited and thereafter to the ultimate beneficiary. It was submitted that the transactions of cash transfer and deposition of cash has nothing to do with the assessee. A strong plea was raised by the Ld. Counsel for assessee that identity of share applicants is established which was strongly denied by the learned CIT DR. At this stage, a query was raised by the Bench as to whether the assessee is in a position to produce before this Bench any of the Directors or the employees of these companies ? The Ld. Counsel for assessee conveniently contended that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the assessee cannot claim to have established the identity of both these companies on the basis of some documents. Leave it apart, as mentioned above, the Ld. Counsel for assessee, in reply to a specific query regarding production of any of the directors or the employees of the share applicants before the Bench, the assessee did not comply with the directions of the Bench, therefore, to this limited extent, we are of the view that these share applicants are non-existent and their identity is not proved. It is pertinent to mention here that there is a difference between a private and public limited company as in a private limited company, the public at large is not subscribing the shares as the shares are allotted to close relatives, friends and other known persons who are having faith in the subscribing company on personal relations whereas there is an invitation to the public at large by a public limited company and not necessarily having personal relations and in that case, the individual relations are normally found to be non-existent. In view of these facts, the share applicants are known to the assessee company, being private limited company, and there should be no diffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ya Niyojay Ltd. ( supra ) (page 14) held as under :- "After the initial onus was discharged by assessee, the Income Tax authorities have made enquiries and had communicated the result of the enquiry to the assessee and required the assessee to produce the subscribers who provided such credit, in order to establish its case. But the assessee did not do so. On this basis addition made by the A.O. u/s 68 of I.T. Act was confirmed." Identically, the Hon'ble Calcutta High Court in the case of Hindustan Tea Trading Co. Ltd. ( supra ) at page 23 (para 21) where the identity of 12 persons who were not found at the addresses it was held that identity is not established. On the issue of onus, it was held that "principle regarding onus is laid down u/s 68 whereby once a reasonable enquiry is made, then the Assessing Officer can do no further except arriving at a conclusion. When such conclusion is communicated to assessee, onus shifts on the assessee. Likewise, Hon'ble jurisdictional High Court in the case of Rathi Finlease Ltd. ( supra ) at page 28 when company is not found at the given address against the summons issued by the Assessing Officer observed as under - "The assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Ltd. ( supra ) Even in the case of Lovely Exports (P.) Ltd. ( supra ) the Hon'ble Delhi High Court in para 4 observed as under :- "Reference to section 68 of the IT Act is conspicuous by its absence, the Stellar Investment Limited ratio cannot be stressed to the extent that it partakes as a reflection on section 68, when the inquiry pertained only to section 263." 25. In view of the facts narrated above and the judicial pronouncements discussed hereinabove, it can be said that the assessee did not discharge the onus cast upon it by the provisions of the Act. We tend to reproduce section 68 of the Act :- "68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year." If the aforesaid provision of the Act is analysed, it speaks about cash credits and the sum found credited in the books of an assessee and the assessee offers no explanation about the nature and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of the assessee. There are contrary decision like Bahri Bros. (P.) Ltd. ( supra ); holding that identity of creditors is not relevant for cheque transactions but at the same time it is not sacrosanct as was held in Nemi Chand Kothari ( supra ). In the case of Shree Barkha Synthetics Ltd. v. Asstt. CIT [2006] 155 Taxman 289 (Raj.) the Hon'ble Rajasthan High Court held that where the matter concerns money receipts by way of share application from the investors through banking channel, the assessee has to prove the existence of the person in whose name the share application is received. Once the existence of the investor is proved, it is not further the burden of the assessee to prove whether that person itself has invested the money or some other person has made investment in the name of that person. The burden then shifts to the revenue to establish that such investment has come from the assessee company itself. 26. Once the receipt of the confirmation letter from the creditor is proved and the identity and existence of the investor has not been disputed, no addition on account of share application money in the name of such investor can be made in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial view nor a binding precedent. We are not going into this controversy because the facts of the present appeals are distinguishable from the facts of Lovely Exports Private Limited. Hon'ble Delhi High Court in a latter decision in Oasis Hospitalities (P.) Ltd. ( supra ) held as under :- "We are of the view that ratio laid down in Steller Investment Ltd. (2001) 251 ITR 263 is applicable only in those cases where the assessee is a limited company and the shares were quoted in the stock exchange. But whenever the issue is subscribed without quoting it on the stock exchange by a 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 person, the onus is upon the assessee to prove the identity of the subscribers and their creditworthiness." 27. There is another perception to look into the decision of the Hon'ble Apex Court in the case of Lovely Exports (P.) Ltd. ( supra ) wherein the Hon'ble Apex Court held that if the share application money is received by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, addition u/s 68 was sustained. This decision is squarely applicable to the facts of the present appeals because identity of share applicant itself was not proved. The principle laid down in the case of Rathi Finlease Ltd. ( supra ) was recently affirmed by Hon'ble jurisdictional High Court in the case of STL Extrusions (P.) Ltd. ( supra ), it has become binding precedent on the Tribunal especially when the decision of the Hon'ble Apex Court in the case of Lovely Exports (P.) Ltd. ( supra ) was very much available. Hon'ble jurisdictional High Court while coming to a particular conclusion followed the decision of the Hon'ble Karnataka High Court in CIT v. ASK Bros. Ltd. [2011] 333 ITR 111 and duly considered the decision from the Hon'ble Apex Court in Lovely Exports (P.) Ltd. and Stellar Investment Ltd. ( supra ). In another latest decision in Oasis Hospitalities (P.) Ltd. ( supra ) UP Bone Mills India Limited and Vijay Power Generators Ltd. v. ITO [2009] 180 Taxman 102 (Delhi) (Mag.), identically held that identity and credit worthiness of share applicants was not proved, therefore, the addition u/s 68 of the Act was justified. While coming to the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Such an inquiry was conducted by the Assessing Officer in the present case. In the course of the said inquiry, the assessee had disclosed to the Assessing Officer not only the names and the particulars of the subscribers of the shares but also their bank accounts and the permanent account numbers issued by the Income-tax Department. Super added to all this was the fact that the amount received by the company was all by way of cheques. This material was, in the opinion of the Tribunal, sufficient to discharge the onus that lay upon the assessee." The Hon'ble High Court took note of many other judgments of many other High Courts and on analysis of those judgments, formulated the following propositions which emerge as under ( Divine Leasing Finance Ltd. ( supra ) :- "In this analysis, a distillation of the precedents yields the following propositions of law in the context of section 68 of the Income Tax Act. The assessee has to prima facie prove - The identity of the creditor/subscriber The genuineness of the transaction, namely, whether it has been transmitted through banking or other undisputable channels The creditworthiness or financial strength of the creditor/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Private Limited and Sunil Shares Stock Limited. It was submitted that on certain occasion there is inter-transfer of funds amongst the three companies, then the cheques were issued to desiring parties in the garb of loan or share capital. Not only that, the shares of Hindustan Continental were claimed to be traded by Sunil Shares Stock Limited, M/s Jai Share Fin Limited and others through manipulation giving rise to artificial height so as to enable certain parties to re-introduce their black money as huge capital gain. It was claimed that in those case also the cash was deposited first in certain account and thereafter the funds were transferred to the share brokers involved in the manipulation and then ultimately to the accounts of the party concerned as sale proceeds of shares. It was also submitted that SEBI has even penalised Hindustan Continental Private Limited and Sunil Shares Stock Private Limited. This assertion of the learned Commissioner of Income Tax was not controverted by the assessee but merely argued that the money was transacted through banking channel and in view of the decision in the case of Lovely Exports (P.) Ltd. ( supra ) their individual accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Supreme Court in the case of Lovely Exports, the issue is covered in favour of the assessee, as per our considered view, the case of Lovely Exports (P.) Ltd. ( supra ) will be applicable only after the identity of the share applicant is established. Since in the instant appeals before us, the identity itself has not been established, there is no justification to apply the ratio laid down by the Hon'ble Supreme Court in the case of Lovely Exports (P.) Ltd. ( supra ). 34. The Hon'ble jurisdictional High Court in the case of Rathi Finlease Ltd. ( supra ) has clearly laid down the proposition with respect to circumstances wherein the identity is established in case the share applicants are companies. It was held that even filing of confirmation of share applicants by the assessee will not serve the purpose of establishing the identity insofar as the inquiry conducted by the Assessing Officer and the letter issued by the Assessing Officer were returned unserved by the postal department with the remark that the addressees are not existing at the given addresses which clearly establishes that either the share applicants are non-existent or if exist, then merely exist on pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of the inquiry conducted by the Assessing Officer was furnished to the assessee only one day prior to the completion of assessment, we found that the assessee has got full opportunity to substantiate its claim and negate the report before the ld. CIT(A) but the assessee grossly failed to rebut the report regarding non-establishment of identity of share applicants. The ld. CIT(A) has got co-terminus powers to do what the Assessing Officer has failed to do. Proceedigns before ld. CIT(A) is also extension of assessment proceedings in addition to the appellate proceedings. However, inspite of full opportunity the assessee failed to rebut the contents of the report which indicated that no shareholders exist in the name of the companies so provided by the assessee. Even though, the report relied by the Assessing Officer was in respect of another assessee but the fact remains that the inquiry was in the case of same share subscribers i.e. M/s. Hindustan Continental Ltd. M/s. Optimates Textiles Ind. Ltd. Under these circumstances, the inquiry conducted in respect of M/s. Hindustan Continental Ltd. M/s. Optimates Textiles Ind. Ltd. which are common applicants in the case of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Shri Kela Prakashan (P.) Ltd., ( supra ) the Tribunal has given a categorical finding that the assessee has proved the identity of the subscribers. therefore, no addition was warranted in the hands of the assessee. However, in the instant case before us, the identity of the subscribers has not been established as per our discussion detailed hereinabove. This finding of the Tribunal was affirmed by the Hon'ble High Court and, therefore, the appeal filed by the revenue was dismissed, whereas in the present appeal the matter was investigated by the Assessing Officer and even the Inspector of the department who was directed by the Assessing Officer to know the whereabouts reported that the share subscribing companies are non-existent and the addressees given of four places were also found to be fictitious. The summons/notices issued by the department were also returned unserved by the postal department with the remark that no such companies are existing at the given addresses, therefore, in the present appeals, the identity of share holders was not proved at any stage, consequently, the decision in the case of Shri Kela Prakashan (P.) Ltd. ( supra ) is not applicable being on d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 lakh to Rs. 2.5 lakhs. In order to verify the genuineness of these transactions, the Assessing Officer issued summons to these parties which were received back either with the remarks "incomplete address" or "in spite of best efforts the address not found" or "not met" or "no such person" or "not found", etc. The Assessing Officer thereafter asked the assessee to produce these persons who had introduced the share capital in the company. The assessee was also asked to furnish cheque numbers/draft numbers for payment of share application money along with the names of the drawee bank and branch of the bank. However, no details were furnished despite various opportunities. The assessee could not even identify the entries in the bank account regarding the receipts of the share application money nor could he produce the relevant ledger for verifying the receipts, according to the Assessing Officer. Ultimately, the assessee produced five persons whose statements were recorded. The assessee did not cross examine these persons. They did not furnish any proof of their identity in the form of ration card, election card or passport despite request by the Assessing Officer. The Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bscribers as subscription can be done by any person. But whenever the issue is subscribed without quoting it on the stock exchange by a 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 identity (sic. Identification) of the subscribers and their credit worthiness. Their Lordships of the Hon'ble Calcutta High Court in the case of Bhola Shankar Cold Storage P. Ltd. v. Joint CIT [2004] 270 ITR 487 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 [1994] 205 ITR 98 and have held that in the case of Steller Investment Ltd. the ratio laid down by the Full Bench of the Delhi High Court was not overruled and it still holds the field. Whenever the issue was subscribed by closely connected persons of the assessee and the assessee has failed to prove the identity and creditworthiness the addition under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee to establish three things necessary to obviate the mischief of section 68 of the Act. These are : (i) the identity of investors; (ii) their creditworthiness/investments, and (iii) the genuineness of the transaction. Only when these three ingredients are established prima facie it is only then the department is required to undertake further exercise as discussed above. In the instant case, no such documents are filed and no steps taken by the assessee which could establish the aforesaid three ingredients. Additional evidence in the form of bank statement, etc. is given but the assessee has not done anything to prove these bank accounts. On this evidence produced by the assessee remand report was called for and the Assessing Officer in his remand report dated December 23, 2003 submitted as under :- "None of the 6 alleged shareholders produced any documents in support of their identity. The fact was intimated to the assessee vide order sheet entries dated June 13, 2002 and March 17, 2003. They are not assessed to tax. They have not produced any documentary evidence showing that they are capable of saving/investing any amount at all. If the persons produced are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (P.) Ltd. ( supra ), Arunananda Textiles (P.) Ltd. ( supra ) order dated 2nd March, 2010, ASK Brothers ( supra ) order dated 18th February, 2010. In both these cases, the Hon'ble Karnataka High Court has duly discussed the decision in Lovely Exports (P.) Ltd. and Stellar Investment Ltd . ( supra ) meaning thereby that both these decisions were rendered after the pronouncements of decisions from Hon'ble Apex Court in Lovely Exports (P.) Ltd. ( supra ). As discussed in other paras of this order, so far as the decision in the case of STL Extrusion Ltd. (supra) is concerned, that decision was rendered by the Bench on the facts that since the assessee proved the identity of the investors, therefore, it was held that no addition can be made in the hands of the assessee company whereas in the present appeals, the existence/identity of share subscribers was not proved, consequently, these judicial pronouncements rather helps the revenue and not the assessee. 41. Even otherwise, if the ratio laid down by the Hon'ble Apex Court in the case of Lovely Exports (P.) Ltd. (supra), while dismissing the Special Leave Petition, it is clear that the initial burden is upon the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this issue and allow this ground of appeal of the assessee. In the result, the appeal of the assessee is partly allowed. 43. In the case of Ad-Manum Packaging Ltd. (IT Appeal No. 158/Ind/2010) for the assessment year 2004-05 the first ground relates to maintaining the addition of Rs. 10 lacs on account of loan taken by the assessee from Hindustan Continental Limited and addition as cash credit u/s 68. The ld. Counsel for the assessee, Mr. Hitesh Chimnani, contended that the learned Assessing Officer/the learned Commissioner of Income Tax (Appeals) have gone stray in passing lengthy orders discussing about capital gains on shares of M/s Hindustan Continental and the investment of the same company in fixed assets and capital work in progress. The financial position of M/s Hindustan Continental was highlighted before us by further submitting that the lender company is a quoted public limited company, the loan amount was advanced by account payee cheque and returned with interest. It was contended that the identity, capacity and genuineness of the transaction were fulfilled by the lender company, M/s Hindustan Continental Limited. The next ground relates to disallowance of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtains to ad hoc disallowance of Rs. 50,000/- out of telephone expenses. For the reasons discussed on identical issue in ITA No. 136/Ind/2009, no ad hoc disallowance of personal nature can be made in the case of a company, therefore, this ground is allowed, consequently, this appeal is partly allowed. ITA No. 158/Ind/2010 - 49. Ground nos. 1 and 2 are identical as we have discussed in preceding paras of this order, therefore, these ground are dismissed. Ground no. 3 is general in nature, therefore, this appeal is dismissed. ITA Nos. 196/Ind/2009 50. Ground no. 1 pertains to confirming the ad hoc disallowance of Rs. 25,000/- made out of telephone expenses. As discussed above, no adhoc disallowance of personal nature can be made in the case of a company, therefore, this ground of the assessee is allowed. 51. Ground no. 2 pertains to addition of Rs. 10 lacs as unexplained credit u/s 68 of the Act. For the reasons discussed in the preceding paras in detail, this ground of the assessee is dismissed, therefore, this appeal of the assessee is partly allowed. ITA Nos. 193/Ind/2009 52. Ground no. 2 pertains to disallowance made u/s 69C of the Act as interest of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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