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2011 (11) TMI 782

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..... ity, genuineness and creditworthiness are proved, therefore, the impugned order was defended. 3. On perusal of record and after hearing the rival contentions, we find that the assessee is engaged in trading of cotton. The Assessing Officer made addition out of unsecured loan of ₹ 1 lac in the name of Shri Sitaram Lohariwala and ₹ 2 lacs in the name of Shri Hanuman Prasad Lohariwala. The assessment was completed u/s 143(3) of the Act on 28.8.2007. These loans were received through account payee cheques and Shri Hanuman Prasad Lohariwala was examined on oath by the Assessing Officer and the addition was made on the ground that the creditworthiness is not proved. Shri Sitaram Lohariwala was not an income-tax assessee, therefore, the amount of ₹ 1 lac was sustained. So far as the deposits from Hanuman Prasad are concerned, he was having PAN No., was filing income-tax returns, his copy of bank account was filed as per which the amount of ₹ 2 lacs was given through cheque meaning thereby the identity and genuineness of transaction as well as creditworthiness is not in doubt, therefore, in view of the decision in the case of CIT vs. Metachem Industries (245 ITR .....

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..... order. This report was confronted to the assessee company by the Assessing Officer, during the assessment proceedings, and after considering the reply of the assessee company it was held that the share capital claimed to be applied by these companies is unexplained, therefore, the same was added to the income of the assessee company. The relevant extract from the assessment order is extracted hereunder :- The contention of the assessee is not acceptable. Assessee has relied upon the decision of Hon ble I.T.A.T., Indore Bench, in case of ACIT vs. Kalani Industries Ltd. the said decision was not acceptable 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 m .....

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..... essee fails to establish identity, creditworthiness and genuineness of the transactions, share application money credited on account of M/s Optimates Textile Industries Ltd. ₹ 1,00,000/- share premium ₹ 9,00,000/- is treated unexplained u/s 68 and added back to taxable income. Total addition under this head is ₹ 50,00,000/- 22. The above finding was confronted to the assessee during appellate proceedings against which the assessee preferred written submissions. During the first appellate stage as well as before us, the Ld. Counsel for assessee has challenged the finding of ACIT on the ground that the said company 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 ₹ 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 throug .....

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..... income tax department receives returns of income or documents without verification of existence of the persons filing the returns/documents. PAN is also allotted to the applicants on the basis of applications without verifying the existence of applicants at the address given in the application. Likewise, Registrar of companies also register a company without physical verification of the existence of the applicant company. There is a specific finding that on verification by the ACIT in the case of M/s Sahayata Marketing Company neither the operators of the accounts were available at the addresses given to the bank nor the introducer. Therefore, 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 th .....

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..... ssessing Officer or the learned Commissioner of Income Tax (Appeals), no such address was furnished by the assessee, therefore, we are of the considered opinion that 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. Even as per preponderance of probabilities, all facts go against the assessee and the ratio laid down by the Hon'ble Apex Court in the case of Sumati Dayal (214 ITR 801) goes against the assessee. Hon'ble Calcutta High Court in the case of Nivendan Vanijya Niyojay Limited (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 Company Limi .....

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..... ot arise. During hearing reliance was placed upon the decision in the case of Stellar Investment Limited; 251 ITR 263 (SC) wherein the issue was subscription of share capital of a public limited company whereas in the present apepals, private limited companies are involved, therefore, there is a material difference between the two as discussed earlier, the shares of private limited companies are generally given to applicants known to the directors whereas in a public limited company the applicants are unknown to the directors. It is pertinent to mention that while coming to a particular conclusion, the Full Bench of Delhi High Court in the case of Sophia Finance Limited (supra) duly considered the case of Stellar Investment Limited. Even in the case of M/s Lovely Exports Private Limited (supra) the Hon'ble ble Delhi HighCourt 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 discusse .....

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..... xplained by the assessee, it is open to the revenue to hold that it is the income of the assessee and no further burden lies on the revenue to show that the income is from any particular source for which we are supported by the decision of the Hon'ble Apex Court in Roshan Di Hatti vs. CIT; 107 ITR 938 and Kale Khan Mohd. Hanif vs. CIT; 50 ITR 1 (SC). It is for the assessee to prove that even if cash credit represents income it is income from a source which has already been taxed for which we are supported by the decision in CIT v. Deviprasad Vishwanathprasad; 72 ITR 194 (SC). The Hon ble Apex in the case of Sumati Dayal vs. CIT; 214 ITR 801 clearly held that if the explanation of the assessee is unsatisfactory, the amount can be treated as income of the assessee. There are contrary decision like Addl. CIT v. Bahri Brothers; 154 ITR 244 (Pat) holding that identity of creditors is not relevant for cheque transactions but at the same time it is not sacrosanct as was held in Nemichand Kothari vs. CIT; 264 ITR 254 (Gau). In the case of Shri Barkha Synthetics Limited vs. ACIT; 155 Taxman 289 the Hon ble Rajasthan High Court held that where the matter concerns money receipts by way of .....

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..... acement, the legal regime will not be the same . Therefore, the facts of that case are not applicable to the case of the assessee as it is a private limited company or closely held company. Besides this, in case of M/s Lovely Exports Limited (in para 23), the Hon'ble Delhi High Court noted that the Assessing Officer has neither controverted nor disproved the material filed by the assessee. However, in the present case, the Assessing Officer after making inquiry disapproved the very first information regarding identity of such creditors as they were found non-existent at all the given addresses. So far as the argument of the learned CIT DR that dismissal of SLP in the case of Lovely Export, where there is no merger of order, is not an expression of judicial 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 CIT v. Oasis Hospitalities Private Limited (2011) 333 ITR 119 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 c .....

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..... holder is proved, onus shifts to the revenue to establish that either the share applicants are bogus or impugned money belongs to the assessee itself. The contrary finding in these cases were confronted to the assessee by the Assessing Officer but the assessee in spite of sufficient opportunity provided, failed to prove the existence of such share applicants companies as the correct addresses were not provided to the Assessing Officer and even the Directors or any of the employees or books of account were not produced. Therefore, the only conclusion arrived at by the Hon'ble jurisdictional High Court in the case of M/s Rathi Finlease Limited that the assessee failed to discharge burden with regard to credits in its books and the existence of its creditors, consequently, 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 M/s Rathi Finlease Limited was recently affirmed by Hon'ble jurisdictional High Court in the case of STL Extrusions, it has become binding precedent on the Tribunal especially when the decision of the Hon' .....

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..... sums found credited in the books of account. What kind of proof is to be furnished by the assessee is a question. It has come up for discussion in various judgments rendered by various Hon'ble Courts including Hon'ble Supreme Court and High Courts. The law discussed by the Hon'ble Court in the case of CIT v. Divine Leasing Finance Limited (2008) 299 ITR 268 is also an important decision to quote. A delicate balance has to be maintained. The Hon'ble Delhi High Court in CIT v. Dolphin Canpack Ltd.; 283 ITR 190 quoted at page 193 the following observations :- ....credit entry relates to the issue of share capital, the Incometax Officer is also entitled to examine whether the alleged shareholders do in fact exist or not. 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 Incometax Department. Super added to all this was the fact that the amount received by the company was all by way of cheques. This mater .....

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..... anies provided accommodation entry to various parties of Indore, Bhopal, Gwalior, Nagpur, Surat, Mumbai, Ahmedabad, Vadodara, and in various other cities through their bank accounts maintained AXIS Bank, Indore, during the period 1.4.2002 to 31.3.2005. The modus operandi operated was that the accommodation entries would first pay the cash which was deposited in bank accounts maintained in the name of M/s Yash Associates, M/s G.R. Investments, M/s V.S. Traders, Path Pradarshak Finvest Pvt. Ltd., M.S. Ribeka Garg and Bhanuraj Singh Ranawat, etc. maintained in the same bank branch (in due course old accounts were closed and new accounts in the name of new concerns were opened). Thereafter, the amount was transferred in any of the account of Hindustan Continental Private Limited, Agrawal Road Carriers 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 thr .....

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..... order by the Tribunal and the inquiry conducted by the Department thereafter. The enquiry so conducted by the Department after the relevant assessment years involved in the case of Kalani Industry, it was found that neither the share applicants were found existing at the address given by the assessee nor at different addresses supplied by the assessee to the Assessing Officer during the course of assessment proceedings. AS the facts of subsequent year are different, the decision arrived at by the Tribunal in assessment year 2003-04 cannot be applied to the assessment years 2005-06 2006-07, facts of which are materially different. 33. The contention of the Ld. Counsel for assessee that in view of the decision of the Hon'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 (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 (supra). 34. .....

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..... eement with the argument of the assessee that the winding up powers of a company lies with the Hon ble High Court but this issue is not before us, therefore, we are refraining ourselves to comment further. It was fairly accepted by the ld. Counsel for the assessee that in the present appeals merely the assessee filed certain documents which did not prove the identity but did not produce the share applicants/subscribers. At the same time, the learned CIT DR time and again is harping that the share applicants are merely paper companies. Therefore, from this angle also, we are not convinced with the argument of the assessee. With regard to the contention of ld. AR that 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 assessmen .....

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..... down in case of Rathi Finlease. He further submitted that jurisdictional High Court in the case of ACIT vs. Shree Kela Prakashan Private Limited affirmed the decision of the Tribunal reported at (2010) 14 ITJ 539 dated 8.10.2009, therefore, the later decision has to be followed. As per our considered view, the contention of the Ld. Counsel for assessee is wholly misplaced insofar as decision of Hon'ble Supreme Court in the case of Lovely Exports (supra) itself presupposes the establishment of identity as a pre-condition for not making addition in the hands of the assessee company. In the case of Shri Kela Prakashan Private Limited, 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 .....

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..... 14 of 2007) (2011) 333 ITR 119 (Del) at page 136 the appeal was admitted on the following question of law :- Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal has erred in law in sustaining the addition of ₹ 25,23,500/- on account of receipt of share application money ? 37. The facts leading to the admission of the aforesaid question were as follows :- The assessee in the income tax return for the assessment year 1997-98 had shown receipts in the form of share money subscribed of 15 per cent to whom the shares were later on allocated. Total money on this account received by the assessee was ₹ 25,23,500. The investment in these shares was ranging from ₹ 1 lakh toRs. 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 als .....

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..... tatement are (sic. Is) placed on record and from its perusal one would find that all these 5 persons are of ordinary status and they have no means to invest a huge sum in shares with the assessee. 16. So far as the legal position and the judgment of the apex court in the case of Steller Investment Ltd. (2001) 251 ITR 263 is concerned, we are of the view that the 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. Once the shares are quoted in the stock exchange and the subscription is open to public at large, the assessee cannot have control over the subscription and also cannot make a verification of the subscribers 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 t .....

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..... is of such statement without an iota of documentary evidence to support, we are of the opinion that the findings of the authorities below cannot be treated as perverse. It is on proper analysis of the statements of these persons which were recorded by the Assessing Officer. When we keep in mind the principle of law laid down in the ratio in the aforesaid decisions and apply the same to the facts of this case, it is difficult to find fault with the approach of the Tribunal. We have to keep in mind that the ratio in a decision cannot be applied in each case. The facts and circumstances of each case are to be weighed and examined as to whether a particular ratio decided in a particular casae could be applied. As noted above, the initial onus is upon thye assessee to establish three things necessary to obviate the mischief of section 68 of theAct. 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 casae, no such documents are filed and no st .....

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..... and addition was rightly made. We, therefore, answer the question in the negative and dismiss this appeal of the assessee. 40. If the aforesaid conclusion drawn by the Hon'ble High Court is kept in juxtaposition with the facts of the present appeal, one fact is clearly oozing out that the assessee has not discharged its onus to the satisfaction of the Assessing Officer and even did not prove the identity of the share applicants. Merely giving the names of such share applicants is not enough especially when these applicants were found non-existent, therefore, this judicial pronouncement clearly goes against the assessee. It is pertinent to mention here that while coming to the aforesaid conclusion the Hon'ble Court also discussed the decisions like AKJ Granites Private Limited; 301 ITR 291 (Raj), CIT v. Arunalanda Textiles Pvt. Ltd. (2011) 333 ITR 116 (Karn.) (para 17) order dated 2 nd March, 2010, CIT v. ASK Brothers (2011) 333 ITR 111 (Karn.) order dated 18 th February, 2010 . In both these cases, the Hon'ble Karnataka High Court has duly discussed the decision in Lovely Exports Pvt. Ltd. and Steller Investment Ltd. (supra) meaning thereby that both these deci .....

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..... credits and further held that if the confirmation is given, no addition could be made against the assessee whereas in the case of the assessee the share applicants were found to be non-existent, therefore, this judicial pronouncement from the Hon'ble jurisdictional High Court clearly goes against the assessee. 42. The next ground pertains to upholding the ad hoc disallowance of ₹ 1 lac made out of telephone expenses. After considering the rival submissions, we find that the learned Assessing Officer made ad hoc disallowance of ₹ 1 lac out of total expenses of ₹ 12,29,154/-. We find that first no reason has been assigned for making such ad hoc disallowance by the Assessing Officer and secondly we are of the view that since the company is a juristic person, no disallowance of personal nature can be made in the case of a company. We, therefore, reverse the orders of the authorities below on this issue and allow this ground of appeal of the assessee. In the result, the appeal of the assessee is partly allowed. 6. In the aforesaid order dated 31.10.2011, after apprising the relevant facts, arguments from both sides and the judicial pronouncements cit .....

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