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TMI Blog2012 (2) TMI 528X X X X Extracts X X X X X X X X Extracts X X X X ..... essee who submitted that identity of share subscribers/share applicants has been proved, therefore, in view of the decision in the case of decision of the Hon'ble Supreme Court in the case of Lovely Exports (P) Ltd. (2008) 172 Taxman 44, no addition u/s 68 of the Act could be made in the hands of the present assessee, whereas the learned Senior DR, Shri Arun Dewan, defended the impugned order. 3. We have considered the rival submissions and perused the material available on file. Brief facts of the case are that the assessee company declared total income of Rs. 70,212/- in the return of income filed on 11.3.08. The Assessing Officer issued notices u/s.143(2) on 18.9.08 which were served on the assessee within the prescribed period. Thereafter, a detailed questionnaire along with notice u/s.142(1) was issued on 28.7.2009 to the assessee which was responded by the assessee. During the course of assessment proceedings, after examining the submissions of the assessee and the balance sheet, the Assessing Officer observed that during the year under consideration, the assessee has shown receipt of share application money from various companies as follows :- S.No Party's Name Addre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. admitted that the shares have been allotted before 31.03.07. The learned Assessing Officer was of the view that the financial capacity of share subscribers was not sound, therefore, he opined that it was the own money of the assessee. He was also of the view that the transactions are only manipulated transactions. The learned Assessing Officer was also of the view that it is a case of unaccounted income brought back into the books of accounts of the assessee company in a systematic and organized manner. He further observed that these companies have been used as mere conduit companies for routing of unaccounted money into the business in the garb of share application money. The source of share application money as received by the assessee company was treated as not properly explained. The learned Assessing Officer also observed that during the course of his statement, the director has himself admitted that the all the share applicants are either his friend or family members. The learned Assessing Officer was also of the opinion that these companies have no business whatsoever and these companies have been opened only for providing entries for share application money as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's case considering the compliance made, provision of section 68 should not have been attracted and reliance has been placed on the Hon'ble Supreme Court decisions in the cases of CIT vs. Steller Investment Limited (2001) 251 ITR 263 (SC) and CIT Vs. Lovely Exports (P) Ltd. (2008) 172 Taxman 44. 3.6 On consideration of the above facts and the submissions made by the learned counsel for the assessee, the learned Commissioner of Income Tax (Appeals) observed as under :- "4.01 Coming to the facts of the case, the AO has clearly brought out relevant facts in the assessment order. The assessee miserably failed to explain and establish the soundness of the decision made by such alleged share applicants for making such substantial investment in the assessee company and some totally vague and unconvincing explanation was offered in this behalf. The AO has clearly made out a case that the share applicant companies were merely paper companies and were not genuine existing legal entities having the financial worth to have made such investment in the assessee company. It is further interesting to note that an amount of Rs. 19,02,500/- which was shown as share application money pending a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital stands at Rs. 2,,17,500/- and Reserve & Surplus stand at Rs. 402.412 lakhs. The application of funds reveal Investment of Rs. 261.99 lakhs and Loans & advances at Rs. 165.31 lakhs. Investments are made entirely in Pvt. Ltd. Cos. and there is cross Investment of Rs. 1,90,000/- in Sri Lal Traders Pvt. Ltd. against investment of Rs. 4.37 lakhs made in this Company by Srilal Traders Pvt. Ltd. as noticed above. (ii) P. & L. A/c reveal that on sale of Rs. 46.52 lakhs and interest on loans at Rs. 1,20,000/- , final net profit stands at Rs. 14,032/- only on such huge share holders funds of Rs. 24.58 lakhs. Details of loans and advances again reveal that loans stand at Rs. 10 lakhs and further advances are given for shares at Rs. 154.95 lakhs. No income whatsoever is accounted from such huge investment in shares and advances given for shares exceeding Rs. 4 crores which clearly suggests that these are only accommodation entries. (Copy of Balance sheet, P.&L. A/c and Investment details as included in Paper book at page 84, 85, 86 and 91 enclosed at Annexure B 1 to B 4). C) Saharsh Suppliers Pvt.Ltd. (i) Share capital stands at Rs. 20,22,000/- and Reserve & Surplus sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fictitious paper companies only. 4.1 Now, the legal contentions are examined. It is worthwhile to note that the observation made by Hon'ble Supreme Court while dismissing SLP in the case of Lovely Exports as has been reported as judgment delivered by the CTR at 216 CTR 295 has been simply stated to be dismissal of SLP in the oldest and still considered to be most leading and reliable Indian Tax Reporter on page 319 ITR 5,6 (statute) in following manner. "Share application moneys received by company 11.1.2008- Their Lordships S.H. Kapadia and B. Sudershan Reddy JJ dismissed the Department's special leave petition against the judgment dated November 16, 2006 of the Delhi High Court in I.T.A No.953 of 2006 reported in 299 ITR 268, whereby the High Court affirmed the deletion by the Tribunal of additions made on account of sums received from directors of promoters and also by way of a public issue. The court while dismissing the special leave petition held as follows: "Can the amount of share money be regarded as undisclosed income under section 68 of the Income tax Act, 1961? We find no merit in this special leave petition for the simple reason that if the share application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer the jurisdiction to inquire from the assessee the nature and source of the sum found credited in its books of account. If the explanation offered by the assesee is found not to be satisfactory further enquiries can be made by the Income-tax Officer himself, both in regard to the nature and the source of the sum credited by the assessee in its books of account, since the wording of section 68 is very wide. The full Bench opined that (page 105): "If the shareholders exist then, possibly, no further enquiry need be made. But if the Incometax Officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons ... If the shareholders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regarded as a capital receipt... but if .... the assessee offers no explanation at all or the explanation offered is not satisfactory then, the provisions of section 68 may be invoked." It will at once become obvious that the court had not reflected upon the questions as to: the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation 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." 4.1.5 The proposition of law laid down is very clear and well-established by various judicial decisions. The landmark judgment elucidating the nature of onus cast u/s.68 on an assessee is that of Shankar Industtries v. Addl.CIT (1978) 114 ITR 689 (Cal.). The principle laid down is to be found on page 698 in the following words: "We would like to observe that the law on this point is now well settled. It is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of this creditor, the capacity of such creditor to advance the money and, lastly, the genuineness of the transaction. These things must be proved prima facie and only after the assessee has adduced evidence to establish prima facie in the aforesaid, the onus shifts on the department. In the instant case, it seems that the assessee established only the identity of the creditor and nothing more." (emphasis provided) Thus, the ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the authority concerned after careful consideration of all relevant materials has come to the conclusion that the assesee's case of a loan from a third party cannot be accepted it is not open to this court to disturb the finding in reference under section 66(1)." This precisely provides the concept of "shifting of onus" in a case covered by section 68 of the Act. 4.1.8 If the above principles of statutory onus on an assesee u/s.68 and of the shifting of such onus from the assessee on to the AO are applied to any case including the present assessee's case, the following position shall emerge. Prima facie proof of the three ingredients and that too cumulatively shall have to be examined at three different stages one after the other but if an assessee fails to establish at the first stage, the identity of the creditor itself, there is no question of an AO examining the matter at the second stage of ensuring and satisfying himself of the capacity of the creditor to advance the moneys and nor therefore, the AO examining the matter at third stage of ensuring and satisfying himself of the genuineness of the transaction. Had the assessee established prima facie the de facto existence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the creditor is first established prima facie paving the way for the AO to examine further the capacity and genuineness aspects. Hence merely based on arranged affairs and supporting documents, the identity cannot be said to be established, and in any case NOT the CAPACITY and GENUINENESS of transaction. The AO as discussed above has clearly established the two individuals to benami persons on behalf of one of the Director. 4.2 It has been further established by a series of decisions that the conclusion whether a cash credit in the books of account of an assessee is properly explained or not is a question of fact [CIT V.S.Nelliappan (1967) 66 ITR 722 (SC); CIT V. Manick Sons (1969) 74 ITR 1, 6(S ). Also see, Jadunandan Sahu Deokisanram V. CIT (1984) 16 ITR 175 (Pat); Hari Chand and Prem Chand Bassi V. CIT (1974) 94 ITR 557 (Delhi); Lakshmiratan Cotton Mills Co. Ltd. V. CIT(1972) Tax LR 585(All); Ram Kumar Jalan V.CIT. Further, whether the explanation offered by the assessee is a satisfactory proof of the nature and source of the cash credits is a question of fact and the finding of the authority that it is a satisfactory explanation is a finding of fact [CIT V. Ghewarchand Kam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the assessee it is not necessary for the revenue to locate its exact source applies alike to cases in which an entry is found in the books of accounts of the assessee as to cases in which no entry is found [CIT V.Durga Prasad More (1969) 72 ITR 807(SC)]. 4.3 Thus, to recapitulate, the correct position that emerges is that onus lies on the assessee to establish identity and creditworthiness of the loan/cash credits and genuineness of the transaction and in each case it has to be decided on consideration of totality of facts and circumstances of the case whether such onus has been discharged by the assessee or not and there is no burden on the AO to link up or establish the source of such credit to the known sources or activities in any manner. In view of such clear proposition of law, it has to be examined whether aforesaid brief decision of Hon'ble Supreme Court in Lovely exports(supra) dismissing the SLP simpliciter after condoning delay with brief observation can be read and understood as laying down the proposition of law as canvassed by the assessee / assessees that even if the contributions of share capital is / are bogus / by non existent persons / entity of no m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayer for special leave to file an appeal. The second stage commences if and when the leave to appeal is granted and the special leave petition is converted into an appeal. (iii) The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it. Under article 136 of the Constitution, the Supreme Court may reverse, modify or affirm the judgment decree or order appealed against while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing of a petition for special leave to appeal. The doctrine of merger can, therefore be applied to the former and not to the latter. (iv) An order refusing special leave to appeal may be non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utory provisions conferring the appellate or revisional jurisdiction and the content and subject matter of challenge laid or which could have been laid. Apart altogether from the merits of the grounds for rejection, the mere rejection by a superior forum resulting in refusal to exercise its jurisdiction which is invoked cannot by itself be construed as the imprimatur of the superior forum on the correctness of the decision sought to be appealed against. Article 141 of the Constitution of India speaks of declaration of law by the Supreme Court: for a declaration of law there should be a speech, i.e. a speaking order. A decision which is not express and is not founded on reasons nor on consideration of the issues, cannot be deemed to be a law declared, to have binding effect as is contemplated by article 141. A summary dismissal by the Supreme Court, without laying down any law, is not a declaration of law envisaged by article 141. When reasons are given the decision of the Supreme Court would be binding on all courts within the territory of India: when no reasons are given, dismissal simpliciter is not a declaration of law by the Supreme Court. " (Emphasis provided) 4.3.2 Furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f three subscribing companies and found that there were numerous transactions, the genuineness of the transaction could not have been assailed. Section 68 enjoined the assessee to offer an explanation about the nature and source of the sum found credited in his books and if the explanation was not satisfactory, the amount can be credited and charged to income as income of the assessee. Since the assessee, though tried to explain the genuineness of the credit on the basis of letters of confirmation, it could not be explained as to how the transaction was materialized when the companies were not in existence and the amount was paid by cheque only on the date on which the amount was credited to the account of the company. It was for the assessee to discharge this burden. Therefore, the assessee failed to discharge the burden with regard to the credit in its book and the existence of the creditors to indicate the genuineness of the transaction - CITV. Steller Investment Ltd. (2000) 164 CTR(SC)287 (2001) 251 ITR4 263(SC) and CIT V. Antartica Investment (P) Ltd. (2003) 179 CTR (Del) 526: (2003) 262 ITR 493(Del) distinguished." 4.3.5 It may be recalled that similar contentions were adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to shares of private company cannot be from public. It, therefore, follows that the subscribers to shares of private company can be only private persons. Such private persons must invariably be persons of confidence and acquaintance of directors of private company and there should be normally, no difficulty in producing them before the AO. And in case, they are not produced, the natural corollary is that the real position is not the same as emerges form papers and documents furnished in this behalf. The company very tactfully and intelligently has tried to overcome the condition of inviting subscription from public. In reply to query from this office to establish genuineness of transaction, it has been admitted by the Assessee that no dividend was distributed and such share applicant companies are found to be dummy / paper companies as discussed in para 4.02 above. Further, investment of almost entire networth by all the four share applicant companies in Pvt.Ltd. companies, that too at premium, where from neither was return is assured, nor safety of investment was guaranteed, not to speak of capital appreciation and lastly such investment being totally illiquid, defies all logic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also been recognized and emphasized. I. GOLD LEAF CAPITAL CORPORATION OF INDIA LTD. VS JCIT 308 ITR (AC) 94 (DELHI) II. ITO VS CHANDIGARH THEATERS (P.) LTD 125 TTJ (CHD) III. MOTLAY FINANCE (P.) LTD VS ACIT- ITAT INDORE BENCH. (ITA NO. 96/IND/48 DECIDED ON 28/01/07) 4.8 Thus, on overall consideration of the facts and circumstances of the case and as discussed in detail above, the amounts claimed to be received by the assessee do not in any way appear to be genuine share capital. They are nothing but arranged affairs being pre-ordained series of transactions and tax evasion device where money laundering transactions have been camouflaged as share application money. Hence no credence can be placed on the copies of various documents filed to support such claim of share capital contribution and addition of Rs. 30 lakhs is hereby confirmed." 4. We have considered the rival submissions and perused the material available on file. Under the aforementioned facts/observations made in the assessment order/impugned order and the assertion made by the learned respective counsels, during hearing the learned counsel for the assessee invited our attention to the reply dated 5.12.2011 (pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese facts, the decision from Hon'ble Apex Court in the case of Lovely Exports Private Limited, 18 ITJ 717 clearly comes to the rescue of the assessee, the relevant portion of the same is reproduced hereunder :- ""Share application moneys received by company 11.1.2008- Their Lordships S.H. Kapadia and B. Sudershan Reddy JJ dismissed the Department's special leave petition against the judgment dated November 16, 2006 of the Delhi High Court in I.T.A No.953 of 2006 reported in 299 ITR 268, whereby the High Court affirmed the deletion by the Tribunal of additions made on account of sums received from directors of promoters and also by way of a public issue. The court while dismissing the special leave petition held as follows: "Can the amount of share money be regarded as undisclosed income under section 68 of the Income tax Act, 1961? We find no merit in this special leave petition for the simple reason that if the share application money is received by the assessee-company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies only, the contention raised on behalf of the assessee is that the net worth (as on 31.3.2007) of such share subscribers is Rs. 317.31 lacs, Rs. 424.58 lacs, Rs. 385.71 lacs and Rs. 289.01 lacs. We are not going on the issue of worth of these share applicants because the Hon'ble Apex Court in the case of Lovely Exports Private Limited (supra) held that even if such share applicants are bogus, but their identity is proved, then no addition is warranted in the case of the assessee. So far as the decisions cited in the impugned order are concerned, in view of the decision from Hon'ble Apex Court in the case of Lovely Exports (supra), has remained for academic interest only, being on different facts, therefore, we are refraining ourselves in dealing with each and every case individually, especially in the light of the evidences, filed by the assessee, evidencing that the identity of such share applicants was very much proved by further filing of confirmation by them. 7. In view of these facts, the decision from Hon'ble Apex Court in Lovely Exports (supra) and uncontroverted fact that the summons issued to the impugned share applicants were duly received by them with f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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