TMI Blog2023 (10) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... records. On Revenue s petition before the Hon ble Supreme Court in their decision in Principal CIT vs. NRA Iron Steel (P) Ltd.[ 2019 (3) TMI 323 - SUPREME COURT] their Lordships held that the assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors and creditworthiness of the investors who should have financial capacity to make the investment in question to the satisfaction of the AO, so as to discharge the primary onus. AO is duty bound to investigate into the creditworthiness of the creditor/subscriber, verify the identity of the subscribers and ascertain whether the transaction is genuine or those are bogus entries of name-lenders. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack creditworthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by section 68. It may be reiterated that in the case before us, despite the availability of banking facilities to the two investors, they invested cash towards purchase of share capital /premium of the closely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claring income of Rs. 17,12,600/-. The case was selected for scrutiny. In response to statutory notice(s) along with questionnaire, compliance was made. The Ld. Assessing Office ( AO ) found that during the year the assessee had raised share application money/share premium from six parties. Out of these two parties namely Late Shri Arvind Mittal and Avdesh Mittal had subscribed share application money and share premium in cash amounting to Rs. 22 lakhs and Rs. 14 lakhs respectively. On query made by the Ld. AO it was submitted that these two parties are agriculturists and owned lands in village Kairana Distt. Shamli (UP) and others. They were not maintaining any bank account and investment by them was made out of cash received from sale of agricultural produce and sale of residential plots. Both of them were relatives of the directors of the assessee company. 6. The Ld. AO issued notice under section 133(6) dated 29.01.2015 to Shri Arvind Mittal (Late) through wife Smt. Nirmala Mittal to furnish requisite details. The summons under section 131 of the Act was issued to Shri Avdesh Mittal who appeared on 11.03.2015 before the Ld. AO. He recorded the statement of Shri Avdesh Mittal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en with regard to the sources explained, I have perused the land revenue extract of khata no. 573, Kairana available at Page 34 of the paper book and find that the total land is 11 bighas included in the checkbandi Khata Khatoni and not 14 Bighas 19 Bissas. No details have been submitted before me to show that the entire amount received on account of fruit cultivation was available for the said investment. If, as argued, the land was being looked after by late Arvind Kumar Mittal, as per family arrangement, then it would be necessary for the undersigned to understand the family situation that is how big was the family, whether or not there was a joint family, who were the members, what were the expenses etc. in order to be convincing to the undersigned that the entire Income from the fruit orchard was available for investment. No such details are available in the affidavit filed before the AO. It is incongruous that the person would have available such large income in the form of cash earned, perhaps over the period of several years, when banking channels were very much available. It is understood from the public domain that there were at least half a dozen banks (SBI, ICICI bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, in land. Neither the year of registration of these immovable properties nor the share in the land holding have been brought on record. But it would be difficult to presume that sufficient funds were available for share investment when these Investments in land have also been made during the corresponding period to the year under appeal. 3.5.3. The other share holder Sh. Avdhesh Kumar Mittal was present before the AO on 11.03.2015 in which he claimed to have invested a sum of Rs. 14 lacs on 02.08.2011 and the sources were explained as having been generated from sale proceeds of crops grown on agricultural lands and sale of residential plots. Hence his identity stands proved but no substantiating documents in the form of evidence for sale of crops, expenses Incurred or statement of affairs showing the cash receipts and withdrawals on account of both the sources Le. agricultural land and sale of residential properties were filed before the AQ. The AO has noted that the three residential plots were sold on dates subsequent to the date of investment in shares i.e. on 14.03.2011, 08.04.2011 and 10.05.2011 for amounts of Rs. 4.90 lacs, Rs. 1.60 lacs and Rs, 2 lacs respectively. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersons are carrying out regular agricultural activities even at present and regularly paying land revenue tax. However, the facts on record show that in most of the cases the land revenue tax has been paid by the persons in whose name the lands were registered. Although briefly mentioned by the AR in the written submission that cash was available with both the shareholders from the sale of family owned agricultural land from time to time, no details in this regard have been filed in the paper book. Keeping in view the entire conspectus of the discussion herein above there is found no merit that the contention of the appellant that the genuineness and creditworthiness of the shareholders stand established. 3.6 The issue involved here is addition u/s 68. Normally the burden is on revenue to show that a receipt which is sought to be taxed is in the nature of income and where the income is exempt under the taxing provisions, the burden is on the assessee to show that it is exempt. However, under the deeming provisions of section 68, any sum, representing a receipt or credit in the books of the assessee is Itself an evidence against the assessee, unless the assessee explains the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source and nature of certain amount of cash received during an accounting year, the Assessing Officer is entitled to draw inference that the receipts are of an assessable nature. Whether explanation should be accepted or not is not to be examined factually but having regard to test of human probabilities and normal course of conduct. Reference can be made to CIT v. Durga Prasad More [1971] 82 ITR 540 (SC), CIT v. Daulat Ram Rawatmull, [1973] 87 ITR 349 (SC) and other cases referred to in CIT v. Nova Promoters Finlease (P.) Ltd. [2012] 342 ITR 169/206 Taxman 207/18 taxmann.com 217 (Delhi). In these cases, it has been observed that what is apparent must be considered real until it is shown that there are reasons to believe that the apparent is not real. Caution must be exercised on self-serving statements made in the documents as they are easy to make and rely upon in case an assessee wants to evade taxes. Proof is required and the assessing authorities should not put blinkers while looking at the documents before them. Surrounding circumstances are equally Important. 3.6.1. One of the vital ingredients of section 68 is the power of the AO to ask the assessee to prove the cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer have to adopt a reasonable approach and when the initial onus on the assessee would stand discharged depends upon facts and circumstances of each case. In case of private limited companies, generally persons known to directors or shareholders, directly or indirectly, buy or subscribe to shares. Upon receipt of money, the share subscribers do not lose touch and become incommunicado. Call monies, dividends, warrants etc. have to be sent and the relationship is/was a continuing one. In such cases, therefore, the assessee cannot simply furnish details and remain quiet even when summons issued to shareholders under Section 131 return unserved and uncomplied. This approach would be unreasonable as a general proposition as the assessee cannot plead that they had received money, but could do nothing more and it was for the assessing officer to enforce for to holders attendance. Some cases might require or justify visit by the Inspector to ascertain whether the shareholders/subscribers were functioning or available at the addresses, but it would be incorrect to state that the assessing officer should get the addresses from Registrar of Companies' website or search for the address ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e share application forms, the form no. 2 filed with ROC, evidencing the allotment of shares and even the ledger account of share holders have not been placed in the paper book in order to indicate that any shares were allotted to these shareholders. It is also relevant to note that, out of the investment of Rs. 22 lakhs and Rs. 14 Lakhs respectively by late Sh. Arvind Mittal and Sh. Avdhesh Mittal respectively, the share premium alone amounts to Rs. 21,56,000/- and Rs. 13,72,000/-. It somewhat incongruous to note that share application money have been received of Rs. 3,55,000/- from one of the Directors, Smt. Anuradha Goel and Rs. 11,50,000/- has been received from Sh. Shubham Goel another Director without any share premium, in the relevant assessment year. Apparently the two share holders were related to the Directors and have invested in the purchase of shares due to their faith In the company (as per the submissions filed before A.O dated 17.03.2015). This argument is considered but found fallacious, as the company was incorporated in the financial year 2010-11 and this was the second year of operation (as per the submissions filed before A.O dated 23.12.2014). The company rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ordinarily the courts are required to gather the intention of the legislature from the overt language of the provision as to whether it has been made prospective or retrospective, and if retrospective, then from which date. However, some times what happens is that the substantive provision, as originally enacted or later amended, fails to clarify the intention of the legislature. In such a situation if subsequently some amendment is carried out to clarify the real Intent, such amendment has to be considered as retrospective from the date when the earlier provision was made effective. Such clarificatory or explanatory amendment is declaratory. As the later amendment clarifies the real Intent and declares the position as was originally intended, it takes retroactive effect from the date when the original provision was made effective. Normally such clarificatory amendment is made retrospectively effective from the earlier date. It may also happen that the clarificatory or explanatory provision introduced later to depict the real intention of the legislature is not specifically made retrospective by the statute. Notwithstanding the fact that such amendment to the substantive provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of clause (b) to section 40. The Hon'ble Supreme Court in the case of Brij Mohan Das Laxman Das V. CIT [1997] 223 ITR 825/90 Taxman 41 held this insertion to be declaratory in nature and hence retrospective. In this case it was held that the interest paid by the firm to a partner on his individual deposits is not hit by section 40(b), if the person is a partner not in his Individual capacity but as representing HUF. The same view was taken in Suwalal Anandilal Jain v. CIT (1997) 224 ITR 753/91 Taxman 337 (SC). However in Rashik Lal Co. v. CIT [1998] 229 ITR 458/96 Taxman 16 (SC), somewhat contrary view was expressed. That is how the matter came up before the larger bench of the Hon'ble Supreme Court in Kanji Shivji Co. (supra). In this case Explanation 2 to section 40(b) has been held as declaratory and hence retrospective in operation by affirming the judgments in the cases of Brij Mohan Das Laxman Das (supra) and Suwalal Anandilal Jain (supra). 13.aa. A survey of the above judgments makes it patent that any amendment to the substantive provision whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. When we advert to the language of section 68, it transpires that it refers to any sum credited in the books of an assessee maintained for any previous year. The expression 'any sum credited' has not been specifically defined in the provision. Thus, it would extend to all the amounts credited in the books of account. A sum can be credited in the books of account, which would invariably either find its place either on the income side of the Profit and loss account or in the liability side of the balance sheet. Items credited to the Profit and loss account are themselves income and hence there can be no reason to make addition once again for them. Items appearing on the liability side of the balance sheet can be loans or share capital etc. Once there is specific reference in section 68 for applying it to any sum credited, there can be no reason to restrict its application only to loans and not to share capital. The burden of proof under 68 can be no different in respect of issue of share capital by closely held companies vis- -vis loans or gifts. The Hon'ble jurisdictional High Court in Maithan International (supra), Active Traders (P) Ltd.(supra), Mimec (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worthiness of creditor and genuineness of transaction. This additional onus, needs to be placed on such companies to also prove the source of money in the hands of such shareholder or persons making payment towards issue of shares before such sum is accepted as genuine credit. If the company fails to discharge the additional one, the sum shall be treated as income of the company and added to its income. It is therefore, proposed to amend section 68 of the Act to provide that the nature and source of any sum credited, as share capital, share premium, etc, in the books of a closely held company shall be treated as explained only if the source of funds is also explained by the assessee-company in the hands of the resident-shareholder. However, even in the care of closely held companies, it is proposed that this additional omur of satisfactorily explaining the source in the hands of the shareholder, would not apply if the shareholder is a well regulated entity, Le.. a Venture Capital Fund, Venture Capital Company registered with the Securities and Exchange Board of India(SEBI) This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of law which always existed, but was not properly construed in certain judgments, there can be no doubt about the same being retrospective in operation. 13.ae. The about discussed judgments from the Hon'ble Summit Court holding a clarificatory substantive provision as retrospective, despite the same being made applicable from a particular year, fully govern the position under consideration. It is Interesting to note that the judgment of the Hon'ble jurisdictional High Court in Mathan International (supra) holding that the burden of proving the credit of share capital etc. is on a closely held company and failure to do so attracts the rigour of section 68, has been delivered on 21.1.2015, much after the amendment carried out by the Finance Act, 2012. This case pertains to pre-amendment era as the order of the tribunal assailed in this case is dated 24.6.2011. It shows that the Hon'ble High Court has also impliedly approved the proposition that the position anterior to the A.Y. 2013-14 was the same inasmuch as the onus to prove the share capital by a closely held company was on it. We, therefore, hold that the amendment to section 68 by insertion of proviso is cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e.f. 01.04.2013 the basic burden of proving the identity, creditworthiness and genuineness of the transaction has to be successfully discharged by the assessee which has not been done. He submitted that it is hard to believe that such huge cash was kept at home when banking facilities are available. He referred to the decision in the case of P.K. Noorjahan 237 ITR 570. 11. We have given our careful thought to the rival submissions and perused the record. The undisputed facts are that two individuals namely Mr. Arvind Mittal (since deceased) Mr. Avdesh Mittal made investment in cash of Rs. 22 lakhs and Rs. 14 lakhs towards purchase of 4400 and 2800 equity shares of face value of Rs. 10/- and premium of Rs. 490 per share respectively of the assessee private limited company during the year. Admittedly both the investors are related to the directors of the assessee company. Since the above sums are credited in the books of the assessee company maintained for the previous year relevant to AY 2012-13 onus to prove the nature and source thereof lay on the assessee company. It is now settled that to obviate the mischief of section 68 of the Act, the assessee has to establish the ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be oblivious of the glaring fact that we are dealing with a case where the assessee is a private limited company of real estate developers and the two investor creditors are relatives of its directors. In case of such a type more heavy burden lies upon the assessee to prove the creditworthiness and genuineness of the transaction which in our humble opinion the assessee failed to discharge. 12. In para 3.6.4 of his appellate order, the Ld. CIT(A) has observed that necessary evidence of allotment of shares and even the ledger account of the shareholders have not been brought on record. The contention of the assessee that the two creditors invested in purchase of shares due to their faith in the company has been found to be fallacious on the basis of facts culled from the records of the assessee company itself. 13. We have gone through the order of the Mumbai bench of the Tribunal in the case of Royal Rich Developers P Ltd. rendered on 24.08.2016 in ITA No. 1835 1836/Mum/2014, extracted by the Ld. CIT(A) in para 3.6.5 of his appellate order. The decision (supra) of Mumbai Tribunal provides complete answer to the contention of the assessee regarding non applicability of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blished. In such a case, the assessee would not have discharged the primary onus contemplated by section 68. 15.2 With the following observations and findings the Hon ble Apex Court set aside the decision (supra) of the Hon ble Delhi High Court: The practice of conversion of unaccounted money through the cloak of share capital/premium must be subjected to careful scrutiny. That would be particularly so in the case of private placement of shares, where a higher onus is required to be placed on the assessee since the information is within the personal knowledge of the assessee. The assessee is under a legal obligation to prove the receipt of share capital premium to the satisfaction of the AO, failure of which would justify addition of the said amount to the income of the assessee. 16. It may be reiterated that in the case before us, despite the availability of banking facilities to the two investors, they invested cash of Rs. 22 lakh and Rs. 14 lakh towards purchase of share capital /premium of the closely held company directors of which were their relatives. On the facts and in the circumstances of the case and following the decision in NRA Iron Steel (P) Ltd. (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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