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2015 (3) TMI 410 - DELHI HIGH COURT

2015 (3) TMI 410 - DELHI HIGH COURT - [2015] 375 ITR 373 (Del) - Unexplained credit u/s 68 - commission paid on entry taken from entry provide - Reopening of assessment - Held that:- The CIT (Appeals), as also the ITAT, in the case at hand, in our view, unjustifiably criticized the AO for not having confronted the assessee with the facts regarding return of some of the summons under Section 131 or not having given opportunity for the identity of all the share applicants to be properly establishe .....

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s appear that the time given to the assessee for proving the identity of the third party was too short, and further that it is probably not always possible for the assessee placed in such situation to be able to enforce the physical attendance of such third party (who, in the case of share applicants vis-à-vis a company, would be individuals at large and may not be even in direct or personal contact), the curtains on such exercise at verification may not be drawn and adverse inferences reached o .....

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entries in question. But, from this inference, or from the fact that the transactions were through banking channels, it does not necessarily follow that satisfaction as to the creditworthiness of the parties or the genuineness of the transactions in question would also have been established.

The AO here may have failed to discharge his obligation to conduct a proper inquiry to take the matter to logical conclusion. But CIT (Appeals), having noticed want of proper inquiry, could not .....

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by the assessee in response to the notice under Section 148 issued by the AO, as also the material submitted at the stage of appeals, if deemed proper by way of making or causing to be made a “further inquiry” in exercise of the power under Section 250(4). This approach not having been adopted, the impugned order of ITAT, and consequently that of CIT (Appeals), cannot be approved or upheld. - Decided in favour of the Revenue. - ITA 525/2014 - Dated:- 11-3-2015 - Hon'ble Mr.S. Ravindra Bhat A .....

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bstantial question of law was framed by order dated 25.11.2014:- ―2.1 Whether in the facts and circumstances of the case ld. ITAT was correct in allowing the appeal of the assessee in regard to addition of ₹71,00,000/- on account of unexplained credit u/s 68 of the Income Tax Act. 2.2 Whether in the facts and circumstances of the case ld. ITAT was correct in allowing the appeal of the assessee in regard to addition of ₹1,42,000/- on account of commission paid on entry taken fro .....

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igation wing of the department it was concluded that most of the entry operators are charging commission @ 2% for giving this accommodation approach to another person and hand over the cash plus commission and take cheques/DDs/Pos. The cash is deposited by the entry operator in a bank account either in his own name or in the name of the relative/friends or other person hired by him for the purpose of opening bank account. The other person (in whose name the account is opened) only signs the blan .....

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gh banking channel in the books of beneficiary these apparently look genuine.‖ 3. Having reasons to believe that income had escaped assessment, the AO re-opened the case for AY 2004-05 under Section 147 of Income Tax Act and issued notice under Section 148 on 18.04.2007. In response to the notice, the assessee filed a copy of the return that had been submitted on 01.11.2004. 4. During the assessment proceedings, thus re-opened, the AO noticed that the assessee had raised share capital from .....

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. 13,00,000/- 11. M/s Fair N Square Exports (P) Ltd. 5,00,000/- 12. M/s Jain Projects & Fin. Consultants (P) Ltd. 7,00,000/- TOTAL 71,00,000/- 5. It is the case of the Revenue that on examination of the details, and as per the information collected on the basis of investigation carried out, it was found that share capital had been received from the following three entry operators who are allegedly engaged in the business of giving accommodation entries: a. Maestro Mktg. & Advertising (P) .....

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n question which direction was not complied with. 7. The AO, thus, treated the amount of ₹71 Lacs as unexplained credit in terms of the provision contained in Section 68 of Income Tax Act and added it to the income of the assessee. The assessee s explanation was rejected by drawing adverse inferences on the following reasoning:- ―(i) Mere payment of a/c payee cheque is not sacrosanct. (ii) Bank account revealed a uniform pattern of cash deposit of equal amount by cash or cheque in re .....

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ssee preferred appeal against the assessment order before the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT (Appeals) ] making the following submissions:- ―(i) The allegation of the assessing officer that some of the summons came back unserved, the assessee was never confronted with any such correspondence. (ii) Assessee had discharged the preliminary burden in terms of Sec. 68 for the existence of the creditors - The parties from whom it has received share appli .....

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of the transaction i.e. the nature of receipts by the Assessee Company by way of Share Application Money is established by the fact that the amounts were received through banking channels, shares were allotted against the amounts received, vide return of allotment dated 29.06.2004, filed with ROC.‖ 10. The appeal was allowed by the CIT (Appeals) deleting the additions made by the AO, inter alia, relying upon CIT v. Lovely Exports Pvt. Ltd., (2008) 216 CTR 195 (SC). The Revenue having pref .....

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following documents before the AO:- ―(i) Confirmations of the parties; (ii) Copies of income-tax returns along with supporting statements; (iii) Copies of the bank statements; (iv) Copies of the Board resolution of the respective share holding companies for subscribing the share applications; (v) Copies of allotment letters; (vi) Copies of the registration certificates of the share holder companies from Registrar of Companies disclosing existence of the companies as per master data from th .....

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to the assessee as late as on 17-12-2008 as against the date of assessment being 26- 12-2008. Similarly, from the entry dated 22-12-2008 the assessing officer vaguely stated that some summons were issued on some parties, some came unserved and none appeared. The same is sketchy and non-specific. We find merit in the argument of the ld. Counsel that it will not be easily possible to ask an assessee to accompany him to the proceedings before the assessing officer. In our view, adverse inference dr .....

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ble Delhi High Court in the case of Gangeshwari Metal Pvt. Ltd. which we have to respectfully follow.‖ 13. It must be noted here that it has been the case of the Revenue that the entities which had given share capital to the assessee company were same as had similarly given share capital to another entity named M/s Nova Promoters and Finlease (P) Ltd. It is stated that the bank accounts statements indicate that there is a uniform pattern of transaction wherein issue of cheques is immediate .....

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fferently. 14. In accepting the contentions of the assessee, the ITAT referred, inter alia, to the decision of this court in CIT v. Gangeshwari Metal Pvt. Ltd. (ITA 597/2012 decided on 21.01.2013) quoting the following observations from M/s Nova Promoters and Finlease (P) Ltd.(supra) and distinguishing it on facts:- "The ratio of a decision is to be understood and appreciated in the background of the facts of that case. So understood, it will be seen that where the complete particulars of t .....

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revenue is to go after the share applicants in accordance with law. We are afraid that we cannot apply the ratio to a case, such as the present one, where the Assessing Officer is in possession of material that discredits and impeaches the particulars furnished by the assessee and also establishes the link between self-confessed "accommodation entry providers" whose business it is to help assessees bring into their books of account their unaccounted monies through the medium or share s .....

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an -a smokescreen - conceived and executed with the connivance or involvement of the assessee excludes the applicability of the ratio. In our understanding, the ratio is attracted to a case where it is a simple question of whether the assessee has discharged the burden placed upon him under sec.68 to prove and establish the identity and creditworthiness of the share applicant and the genuineness of the transaction. In such a case, the Assessing Officer cannot sit back with folded hands till the .....

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ITAT:- ―6.1. A perusal of the order-sheet entries will clearly reveal that on 17-12-2008 the assessee was asked to produce the parties for physical verification. It is submitted that in income-tax proceedings it is not possible for the assessee to enforce attendance of any person to physically bring him before any income-tax authority. The assessee has neither the powers nor the ability to convince the parties to come with it to attend before the assessing officer. On 22-12-2008 assessee w .....

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008 assessee in all humbleness expressed his inability to produce the parties in short period. The additions were made without conducting any inquiry and assessing officer sitting in his chamber held that assessee did not discharge its burden. Thus, the entire edifies of the assessing officer drawing the adverse inference is on wrong premise i.e. without conducting any inquiry, verification of income-tax record and without any confrontation to the assessee. In the absence of any exercise what so .....

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e ground that the reliance on CIT v. Gangeshwari Metal Pvt. Ltd. (supra) was not correct inasmuch as unlike the said case, here the AO had issued summons to the share applicants which either remained unserved or were not responded to and when the assessee was confronted with this fact-situation and given opportunity to produce the share applicants, there was failure in compliance. 18. It must be noted at this stage that the assessee had also come up with appeal (ITA No. 289/2014) impugning the o .....

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g would be remitted to the ITAT for determination. 19. The argument of the Revenue that the entities which had provided the share capital having been found in case of M/s Nova Promoters and Finlease (P) Ltd. (supra) to be engaged in the business of giving accommodation entries, similar transactions indulged in here cannot be treated otherwise must be rejected outright. Each case has to be examined on its own merits and the adverse findings recorded in the other case concerning assessment of a di .....

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e income of the assessee of that previous year: Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- (a) the person, being a resident in whose name such credit is recorded in the books of such company als .....

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provisos were added to the main provision in Section 68 as extracted above by Finance Act, 2012 and came into effect from 01.04.2013. Therefore, they would not strictly apply to the case at hand which relates to AY 2004-05. 22. The objective behind the provision is to hold the assessee accountable for each sum found credited in his books of accounts by responding to the call of the AO to give satisfactory explanation about nature and source of such sums. If no explanation is forthcoming or the e .....

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ous persons. If the AO doubts the genuineness of such investors as had purportedly subscribed to the share capital, the assessee is generally asked to explain the nature and source as also the genuineness of the transaction. 24. The provision contained in Section 68 read in above context suggests that the initial burden of proof is on the assessee to explain. The question as to what kind of proof is to be furnished by the assessee to discharge such burden, however, has been the subject matter of .....

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hree appeals including ITA No. 953/2006 concerning Lovely Exports. The conclusions in para 16 of the judgment in CIT v. Divine Leasing and Finance Limited (supra) need to be extracted as under:- ―16. 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 transmi .....

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nly 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 AO take such repudiation at face value and construe it, without more, against the assessee. (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.‖ [em .....

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information were filed. The Assessing Officer did not carry out any inquiry into the income tax records of the persons who had given their file numbers in order to ascertain whether they were existent or not. He neither controverted nor disapproved the material filed by the assessee. Further, the assessee had specifically invited the Assessing Officer to carry out an enquiry and examine the assessment records of the share applicants whose income tax file numbers were given. Though the Assessing .....

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tworthiness of the share applicants which he was unable to discharge...‖ [emphasis supplied] 27. The matter concerning CIT v. Lovely Exports Pvt. Ltd. (supra) was taken by the Revenue to the Supreme Court. The Special Leave Petition was dismissed in limine with the following observations:- 2. Can the amount of share money be regarded as undisclosed income under S. 68 of IT Act, 1961? We find no merit in this Special Leave Petition for the simple reason that if the share application money i .....

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of Income Tax Act were dismissed by another Division Bench of this court by judgment rendered on 31.01.2011 reported as CIT v. Oasis Hospitalities Pvt. Ltd. (2011) 333 ITR 119 (Del.). Taking note of the jurisprudential development on the subject as culminating in judgment of Supreme Court in CIT v. Lovely Exports Pvt. Ltd.(supra), it was held that the initial burden is upon the assessee to explain the nature and source of the share application money and in order to discharge this onus, the asse .....

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eceived money from the applicant shareholder and that it had come not from the coffers of the assessee but from that of the applicant shareholder. As to the creditworthiness or financial strength of the subscriber, the proof could include banks statements of the subscriber showing sufficient balance in its kitty to enable it to subscribe. 29. In M/s Nova Promoters and Finlease (P) Ltd. (supra), this court found the facts as under:- ―41. In the case before us, not only did the material befo .....

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ee-company in the modus operandi followed by Mukesh Gupta and Rajan Jassal. Thus, on crucial factual aspects the present case stands on a completely different footing from the case of CIT v Oasis Hospitalities P. Ltd. (supra).‖ [emphasis supplied] 30. The judgment in the case of CIT v. Gangeshwari Metal Pvt. Ltd. (supra), which has been referred by the ITAT in the impugned order followed the same line of reasoning but with adverse result for the Revenue because, on facts, it was held that .....

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mined. The counsel, however, conceded that the documents, thus, submitted would not cover each of the twelve entities. He submitted that sufficient opportunity was not available to procure similar documents from the other share applicants or to produce them before the AO. In this context, he pointed out that the communication for physical production of the parties was received on 17.12.2008 whereas the assessment was finalized on 26.12.2008. It was further argued that it had been submitted befor .....

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enuineness of the transactions of each of the twelve entities was duly established is unfounded, in that, the order leading to such conclusion is silent as to the material, which it is based upon. Counsel submitted that the ITAT was not correct in concluding that the assessee was not confronted with the adverse material. He pointed out that this conclusion is in the teeth of the other conclusions that insufficient time was given for production of the parties in question after the summonses under .....

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gation on the part of a company called upon it to explain a sum credited in its books of accounts described as share application money to support it with explanation of the share applicant about the nature and source of such sum credited in his name. In such scenario, it could not be expected that the company which had received the share application money in response to the offer made to the public at large to collect minute details respecting the share applicants to the extent of it being able .....

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uding in the form of share application money credited in its book by a company) must collect and have in its possession some proof to satisfy, when the need arises, the assessing authorities not only as to the identity of the party making the payment but also its creditworthiness as indeed the genuineness of the transaction. 34. From the orders passed by the three authorities below, it does appear that the assessee in the case at hand had submitted some documents respecting the twelve entities i .....

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ns made by the AO, in which result the ITAT concurred, on the reasoning that the AO had failed to point out any discrepancy in the evidence relied upon by the assessee and because the AO had failed to pursue the matter further for making inquiries , inasmuch as it was equally the duty of the AO to have taken steps to verify their assessment records . 35. Assessment proceedings under the Income Tax Act are not a game of hide and seek. The inquiry in the wake of a notice under Section 148 is not a .....

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Section 260-A, which is restricted to consideration of substantial question of law , if any arising. As would be seen from the discussion that follows, the obligation to make proper inquiry and reach finding on facts does not end with the AO. This obligation moves upwards to CIT (Appeals), and also ITAT, should it come to their notice that there has been default in such respect on the part of the AO. In such event, it is they who are duty bound to either themselves properly inquire or cause such .....

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der Section 147 that the income (purportedly represented by the unexplained sums found credited in the books of accounts), within the mischief of Section 68, it is inherent that the explanation of the assessee respecting such credit entries would be called for only with circumspection and solely upon some concrete material coming up to support the tentative impression about it being suspect. 37. Thus, when the AO sets about seeking explanation for the unaccounted credit entries in the books of a .....

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embarked upon such exercise, the AO is not expected to short-shrift the inquiry or ignore the material submitted by the assessee. 38. The provision of appeal, before the CIT (Appeals) and then before the ITAT, is made more as a check on the abuse of power and authority by the AO. Whilst it is true that it is the obligation of the AO to conduct proper scrutiny of the material, given the fact that the two appellate authorities above are also forums for fact-finding, in the event of AO failing to d .....

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in terms of sub-section (4) which reads as under:- ―The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as he thinks fit, or may direct the Assessing Officer to make further inquiry and report the result of the same to the Commissioner (Appeals).‖ 39. The further inquiry envisaged under Section 250(4) quoted above is generally by calling what is known as remand report . The purpose of this enabling clause is essentially to ensure that the matter .....

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of the transaction. Whilst it is true that the assessee cannot be called upon to adduce conclusive proof on all these three questions, it is nonetheless legitimate expectation of the process that he would bring in some proof so as to discharge the initial burden placed on him. Since Section 68 itself declares that the credited sum would have to be included in the income of the assessee in the absence of explanation, or in the event of explanation being not satisfactory, it naturally follows that .....

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ng return of some of the summons under Section 131 or not having given opportunity for the identity of all the share applicants to be properly established. The order sheet entries taken note of in the order of CIT (Appeals) seem to indicate otherwise. The order of CIT (Appeals), which was confirmed by ITAT in the second appeal, does not demonstrate as to on the basis of which material it had been concluded that the genuineness of the transactions had been duly established. There is virtually no .....

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als at large and may not be even in direct or personal contact), the curtains on such exercise at verification may not be drawn and adverse inferences reached only on the basis of returning undelivered of the summonses under Section 131. Conversely, with doubts as to the genuineness of some of the parties persisting on account of non- delivery of the processes, the initial burden on the assessee to adduce proof of identity cannot be treated as discharged. 41. We are inclined to agree with the CI .....

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