TMI Blog2013 (6) TMI 921X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the entire activities, such as receipts of share application money, loans, construction of building etc. were done during the previous year relevant to the assessment year under consideration. The assessee filed return of income on 30.10.2004 declaring loss of Rs.12,80,284/-. According to the AO, the assessee had received share application money from 30 agriculturists, the details of the same are noted at page 2 of the assessment order amounting to Rs.14,65,000/-. Further as per AO, the assessee could not prove the identity and creditworthiness of these agriculturist and accordingly by invoking provisions of section 68, addition of Rs.14,65,000/- was made. The assessee challenged addition before the ld. CIT(A) and it was submitted that the assessee is a new company and received share application money. Therefore, could not be said to have any income from undisclosed source. The assessee company was incorporated on 19.09.2002 with the objects to carry on the business of cold storage. The construction of the cold storage started during the financial year 2003-04 and it was completed by the end of Feb. 2004 and started functioning thereafter only. Therefore, the company was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding and income certificates, Copies of which are filed in the paper book. In some cases, copies of identity card, driving license and other evidences have been filed to prove the identity of the share applicants. He has submitted that same information was also supplied to the Registrar of Companies (copies filed at page 158 of the paper book). He has submitted that same share holders also stored their potatoes in the cold storage of the assessee. He has submitted that the share application money was received prior to commencement of actual business and it is the first year of business of assessee. Construction of the cold storage was completed in Feb. 2004 and majority of the share application money was received prior to commencement of business. Therefore, the same could not be treated as undisclosed money of the assessee. He has, therefore, submitted that the assessee had discharged the onus to prove identity of the share applicants and their creditworthiness and genuineness of the transactions. Once the assessee proved the existence of the share holders, no addition could be made in the case of assessee. In support of his submissions, he has relied upon the following decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and records perused. The crux of the matter to examine in the case under consideration whether under the facts and circumstances the CIT(A) is correct in deleting the addition on account of cash credit and share application money made by the A.O. under section 68 of the Act. Section 68 of the Act empowers the A.O. to treat any sum found credited in he books of account of the assessee for any previous year, if the assessee fails to offer an explanation about the nature and sources of such fund or if the explanation offered by the assessee is not, in the opinion of the AO, satisfactory, as income from undisclosed sources and charge the same to tax as income of the assessee of that previous year. The power of the A.O. under section 68 is not an absolute one. It is subject to his satisfaction where an explanation is offered. The power is absolute where the assessee offers no explanation. The satisfaction with regard to the explanation is in effect an in-built safeguard in section 68 protecting the interest of the assessee. It provides for an opportunity to the assessee to explain the nature and source of the fund. Once it is explained, it is incumbent on the A.O. to consider the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether that person itself has invested the said money or some other person has made investment in the name of that person. The burden then shifts on to the revenue to establish that such investment has come from the assessee-company itself. Once the receipt of the confirmation letter from the creditor is proved and the identity and the 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 assessee s hands. 26. The identity of the shareholder can be proved by either producing the person before the A.O. or by way of documents, registered address, PAN etc. The genuineness of the transaction can be shown from the fact that the money has been received from the share holder. If the money is received by cheque and is transmitted through banking or other indisputable channels, the genuineness of transaction would be proved unless otherwise material found. Other documents showing the genuineness of transaction could be the copies of the shareholders register, share application forms, share transfer register, etc. The creditworthiness of the creditor/subscriber can be proved by producing the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Z for Rs.12,000 and in the name of R for Rs.8,000. Both Z and R gave statements before the Income Tax Officer that they had deposited the amounts with the assessee. The Income Tax Officer did not accept those statements and added a sum of Rs.20,000 as income of the assessee from undisclosed sources. On appeal, the Appellate Assistant Commissioner deleted the addition. On further appeal, the Appellate Tribunal held that the deposits by Z and R remained unexplained, that the mere admission of the depositors could not lead to the conclusion that they were in a position to advance the moneys to the assessee and, since the assessee could not prove that the depositors were in a position to make the deposits to the extent they stood in the books, the onus that lay on the assessee under section 68 of the Income Tax Act, 12961, had not been discharged. The Tribunal also found that as the depositors were doing some business and later filed income tax returns, it would be fair and reasonable to allow a sum of Rs.5,000/- as effectively explained but the remaining Rs.15,000 should be added to the income of the assessee. On a reference at the instance of the assessee: Held, that if the cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of money in part at least, there was no material for the Tribunal to hold that the assessee had not discharged the onus on him and the finding to that effect must be held to be without any evidence and, hence, wholly illegal and the conclusions drawn perverse. Therefore, the assessee had discharged the onus within the meaning of section 68 of the Act for the cash credits and the Appellate Tribunal was not justified in maintaining the addition of Rs.15,000 as the assessee s income from undisclosed sources. 30. The Hon ble Delhi High Court in the case of CIT vs. (1) Divine Leasing Finance Limited (2) General Exports Credits Limited (3) Lovely Exports Pvt. Ltd, 299 ITR 268 (Delhi) held as under :- (page nos. 275 to 276) We find it indeed remarkable that the attention of the Sophia Finance the Full Bench had not been drawn to the decision of the Supreme Court in CIT v. Orissa Corporation P. Ltd. [1986] 159 IR 78, which if cited would really have left no alternative to the Full Bench but to arrive at the conclusion it did. The books of account of the assessee contained three cash credits aggregating Rs.1,50,000 allegedly received as loans from three individual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in CIT v. Precision Finance P. Ltd. [1994] 208 ITR 465 that it is not sufficient for an assessee to disclose that credits in their books had been received through banking channels; the identity as well as the creditworthiness of the creditor must nevertheless be proved. In Sajan Dass and Sons v. CIT [2003] 264 ITR 435 (Delhi) the Division Bench was not convinced that merely because moneys could be identified and traced through banking channels the genuineness of the gift in question stood established. This is obviously because an assessee can scarcely be heard to say that he does not know all particulars pertaining to the donor. Thereafter, the same dialectic led the bench to arrive at the opposite conclusion in CIT v. R.S. Sibal [2004] 269 ITR 429 (Delhi). In CIT v. Makhni and Tyagi P. Ltd. [2004] 267 ITR 433, this court has not given its imprimatur to the inaction of the Assessing Officer in doing nothing further after the issuance of summons under section 131 of the Income Tax Act. It did not condone the Assessing Officer, failing to issue coercive process, and in this manner attempting incorrectly to shift the burden on the assessee to establish the legitimacy of the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d capital as the undisclosed income of the company. In CIT v. S. Kamaraja Pandian [1984] 150 ITR 703, the Madras High Court took the view that it is for the assessee to initially prove the genuineness of the loan, and that the onus shifts to the Department only after the assessee has prima facie substantiated this fact. In that case, one of the creditors had denied the transaction. The Patna High Court in Addl. CIT v. Hanuman Agarwal [1985] 151 ITR 150 was faced with the availability of a confirmatory letter filed by the assessee in whose books of account a credit was found. GIR number of the creditor was supplied, and it appears that he had confessed that this transaction was not genuine. The High Court did not act on the confession since it had not been made available to the assessee. The Bench observed that since the correct name and address, and the GIR number of the creditor had been supplied by the assessee the initial onus under section 68 of the Income Tax Act had been completely discharged by the assessee. It could not be sanguine to conceive of a possibility of a genuine contributor abandoning his investment for diverse reasons. That would not lead to the conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be resorted to, it is necessary for the assessee to prove and establish the identity of the subscriber, their creditworthiness and the genuineness of the transaction . Once material to prove these ingredients are produced it is for the Assessing Officer to find out as to whether, on these materials, the assessee has succeeded in establishing the ingredients mentioned above. The Assessing Officer can lift the veil and enquire into the real nature of the transaction. CIT v. Ruby Traders and Exporters Ltd. [2003] 263 ITR 300 (Cal), CIT v. Nivedan Vaniya Niyojan Ltd. [2003] 263 ITR 623 (Cal) and CIT v. Kundan Investment Ltd. [2003] 263 ITR 626 (Cal) are the other three. 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 (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness of financial strength of the creditor/subscriber; (4) if relevant details of the address or PAN identity of the creditor/subscriber ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion if the duty presently resting on the Department is thought to be too onerous. We ought not to twist the language of a statute to remove the burden of proof altogether from the Department even though it has the necessary wherewithal to discharge it. The malaise can also be arrested if unclaimed share subscriptions are taken over by the State and/or if the assessee concerned is precluded from distributing dividends, bonus shares, etc., against such share subscriptions unless they are duly claimed by the original subscribers within a prescribed period, perhaps not exceeding three years. Thereafter, the shares could automatically stand transferred to the State on the principle of escheat. For these events to happen, requisite amendments to the Income Tax Act may be required. 31. The above judgement of Delhi High Court in the case of CIT vs. (1) Divine Leasing Finance Limited (2) General Exports Credits Limited (3) Lovely Exports Pvt. Ltd, 299 ITR 268 (Delhi) confirmed by the Apex Court as under :- (319 ITR (Statutes) page nos.5 6) Share application moneys received by company 11-1-2008: Their Lordships S.H. KAPADIA and B. SUDERSHAN REDDY JJ. Dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly worded, its finding appears to be that in the very nature of things the assessee could not have earned such a huge amount as profits very soon after it commenced its activities. A construction company takes time to earn profits. It could not have earned profit of Rs.1,00,000 within a few days, after the commencement of its business. Hence, it is reasonable to assume that those cash credit entries are capital receipts though for one reason or other the assessee had not come out with the true story as regards the person from whom it got those amounts. It is true that in the absence of satisfactory explanation from the assessee the ITO may assume that cash credit entries in its books represent income from undisclosed sources. But what inference should be drawn from the facts proved is a question of fact and the Tribunal s finding on that question is final. 34. The Hon ble Allahabad High Court in the case of India Rice Mills vs. CIT, 218 ITR 508 (All.) held as under :- (headnote page nos. 508 509) The assessee-firm which was constituted on August 12, 1977, became operative from February 2, 1978. During the period from 1977 to February, 1978 ten partners of the firm made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether such funds are explained or unexplained, are liable to be drawn in their respective cases. In respect of loan of Rs.25,51,000/-, we find that the assessee has also discharged its burden cast under section 68 of the Act. We notice that some of the loans were given by the same persons who had applied for share application money. When the assessee has discharged his burden in respect of share application money and furnished sufficient material, under the circumstances, it cannot be held that the share application money was genuine transaction and loan transaction was bogus. It is pertinent to mention that inspite of details furnished by the assessee, the A.O. did not examine any of the creditors before rejecting the assessee s contention and documents furnished. The A.O. examined two persons wherein they confirmed that they had applied for the shares of the company and share application amount was given by them. Under the facts and circumstances, when the assessee discharged its burden by furnishing necessary evidence and material in respect of identity, creditworthiness and genuineness and there is no contrary material to the finding of the CIT(A) on record or neither has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 affirmed. 6.4 Hon ble Allahabad High Court in the case of CIT vs. Jaiswal Grains Store (supra) held as under : The assessee ran a store in the name of J. During the assessment proceedings for the assessment year 1976-77, the Incometax Officer noticed that the three partners invested Rs.5,000 each on August 1, 1975, the first day of the accounting period relevant to the assessment year in question. The Income-tax Officer added the entire amount of Rs.15,000 as income from undisclosed sources. The Tribunal deleted the addition. On a reference : Held, that the deposit of Rs.5,000 by each of the partners was made on the first day of the start of the assessee s business. On the first day of the business, it could not be assumed that the assessee, which was a firm, though assessed in the status of an association of persons had unexplained income of Rs.15,000. The addition had been rightly deleted. 7. Considering the facts of the case, evidences available on record and in the light of above decisions, it is clear that the assessee had discharged burden in respect of genuine receipt of share application money by furnishing complete details in the form of share appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnization of cold storage for horticulture produce. The subsidy is admissible to the borrower under the scheme will be kept in subsidy reserve account borrower-wise in the books of account of the financing banks. The adjustment of subsidy from bank term loan will be on the pattern of back ended subsidy. As the subsidy is not available at the disposal of the assessee and even it was not adjusted by bank from the term loan account as per terms of the scheme, therefore, the advance installment of subsidy was not a final amount until the completion of project. Therefore, this subsidy was not final amount or a determined value for any purpose. As per this scheme, the assessee is eligible for subsidy @ 25% of the total project cost. Therefore, no deduction is justified. The assessee relied upon the decision of the Supreme Court in the case of ITO vs. P.J. Chemicals Ltd and others, 210 ITR 830. It was submitted that the final amount on the subsidy is determined only on the completion of project and further subsidy was not related to the plants and machinery only. Therefore, the addition was unjustified. The ld. CIT(A), however, did not accept the contention of the assessee and dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to total cost of the project. It would, therefore, prove that the assessee has not actually received the subsidy in the year under consideration. The assessee in the balance sheet has given treatment to the subsidy both in liability and the asset. It is available to the bank and no term loan or interest is allowable. Since it was claimed that it was a advance installment of capital subsidy, it was not a final amount until completion of the project, therefore, such facts of completion of project and availability of subsidy on accrual method as availability of subsidy to the assessee on final determination of the cost of project, should have been considered by the authorities below in proper perspective. The assessee before us has not given complete facts as when the subsidy would accrue/received by the assessee on completion of project. Therefore, neither the AO nor the assessee have brought complete facts on record for determination of issue involved on this ground. Therefore, it is necessary that the AO should verify the scheme in question and should also verify whether the subsidy is dependent upon the determination of final amount on completion of project and as to when ..... X X X X Extracts X X X X X X X X Extracts X X X X
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