Citation Codes

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Case Number

ITA 262/2012

Advocates

Ms. Suruchi Aggarwal, Sr. Standing Counsel.
Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates.

Judges

Justice R.V. Easwar
Justice S. Ravindra Bhat

Acts

COMPANIES ACT 1956

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Smart Summary

Structured Summary of the Opinion (S. Ravindra Bhat, J.)

Factual and Procedural Background

For assessment year 2007-08 the Assessing Officer (AO) added back Rs. 4,34,00,000 as unexplained credit under Section 68, treating share application money received from nine applicants as unexplained. The AO recorded that, notwithstanding documentary material produced by the assessee (PAN numbers, addresses, audited accounts, bank statements, and return of allotment filed with the ROC), the assessee had not adequately explained the source of the funds and some statutory notices under Section 133(6) were returned unserved. The assessee appealed to the Commissioner of Income Tax (Appeals) who, relying on a number of precedents (including Dwarkadhish Capital and Lovely Exports), deleted the addition. The Tribunal (ITAT) upheld the CIT(A)'s order and also deleted the addition. The Revenue appealed to this Court. The central legal dispute concerns whether the ITAT/CIT(A) were correct in deleting the AO's addition of Rs. 4,34,00,000.

Legal Issues Presented

Whether, on the facts and circumstances of the case, the ITAT could delete the entire addition of Rs. 4,34,00,000/- by relying on the fact that the AO had not doubted the identity of the share applicants and on precedents such as Lovely Exports and Girdhari Lal (i.e., whether deletion was appropriate once the assessee established identity and basic particulars).

Arguments of the Parties

Revenue's Arguments

The assessee sought substantial share application money in the first year of operation at large premiums (Rs. 90-190 per share) from nine applicants; five of nine statutory notices under Section 133(6) were returned unserved.
Returns of income of the share applicants (as furnished by the assessee) disclosed very meagre incomes, and the AO observed large transfers into the accounts of those applicants immediately prior to issuance of cheques to the assessee—facts which gave reason to treat the sums as unexplained cash credits under Section 68.
Given those circumstances, the AO was justified in adding back the amount; reliance on Lovely Exports and similar precedents did not preclude the AO from drawing legitimate inferences from the available facts and making further enquiry.

Assessee's Arguments

The assessee argued that it had discharged the initial onus under Section 68 by producing necessary material: identity particulars (PAN, addresses), ROC extracts/returns, bank statements, audited accounts and return of allotment.
Once the initial burden was discharged, the onus shifted to the Revenue to make further enquiries if it sought to displace the assessee's case; mere non-service of some notices would not defeat the assessee's proof of identity and genuineness.
The assessee relied on leading decisions (including Lovely Exports, Dwarkadhish Capital, Divine Leasing, and Gupta Citi Shelters) to support the contention that the AO must make verifiable enquiries and cannot treat the amounts as undisclosed income solely on suspicion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income Tax v. Lovely Exports (P) Ltd. (referred also as C.I.T v. Lovely Exports P Ltd., 216 CTR 195)	Once the assessee furnishes material proving identity of share applicants, burden shifts to Revenue; Department may reopen individual assessments but cannot treat share application money per se as assessee's undisclosed income without further enquiry.	The CIT(A) and ITAT relied upon this decision to delete the addition. The Court acknowledged the rule of "shifting onus" from Lovely Exports but held that it does not preclude Revenue from drawing legitimate inferences or conducting further enquiry when the information furnished is not credible/verifiable.
Commissioner Of Income Tax-IV v. M/s Dwarkadhish Capital (P) Ltd. (2010) 194 Taxman 43 (Delhi)	In Section 68 proceedings, if assessee proves identity (PAN/AT number) and shows genuineness by documentary proof (e.g., account payee cheques), the onus shifts to Revenue; assessee need not prove "source of source".	The CIT(A) explicitly relied on this decision; the Court noted that Dwarkadhish was considered to support deletion but observed that factual circumstances here (unserved notices, meagre incomes, transfers) permitted the AO to draw adverse inferences.
CIT v. G.P. International Ltd. (2010) 325 ITR 25 (P&H)	Referenced as a supportive precedent for the assessee on the question of burden/identity in s.68 cases.	Listed among authorities relied on by the assessee before the CIT(A); the CIT(A) appreciated reliance on such judgments when deleting the addition.
CIT v. Orbital Communication Pvt. Ltd. (2010) 327 ITR 560 (Delhi)	Referenced as a supporting authority on identity/genuineness in share-application cases under s.68.	Considered by the CIT(A) in deleting the addition; included in the cluster of authorities supporting the assessee's position.
Girdhari Lal v. Commissioner Of Income Tax, 26 ITR 736	Principle that no addition/disallowance can be made on suspicion, surmises and conjectures (a settled principle of law cited from Supreme Court).	Relied on by CIT(A) to support deletion: the CIT(A) cited Girdhari Lal among authorities that additions cannot be made on mere suspicion. The High Court acknowledged the principle but examined whether AO's inferences were legitimate on the facts.
Omar Salay Mohammed Sait v. CIT, 37 ITR 151	Listed among Supreme Court decisions establishing that additions cannot be based on suspicion alone.	Cited by the CIT(A) as part of the legal context; the Court noted these authorities but focused on factual verifiability in the present case.
Dhakeshwari Cotton Mills Ltd. v. CIT, 26 ITR 775	Another Supreme Court authority cited for the proposition that suspicion/surmises are inadequate for making additions.	Referenced by the CIT(A); the Court took into account the line of authority but assessed whether the AO's factual inferences were permissible here.
Lal Chand Bhagat Ambica Ram v. CIT, 37 ITR 288	Supreme Court authority cited on the limits of additions based on suspicion.	One of the authorities cited by the CIT(A); considered in the matrix of legal principles but weighed against the factual circumstances before the AO.
Acchyalal Shaw v. ITO (2009) 30 SOT 44 (Kol) (URO)	Observation that "suspicion cannot replace evidential document" and mere allegation is insufficient without evidence.	Cited by CIT(A) as supporting the assessee's contention. The High Court noted the principle but examined whether the AO had evidence to justify the addition in the present facts.
Commissioner Of Income Tax… v. Divine Leasing & Finance Ltd. (2008) 299 ITR 268 (Del)	Used by the assessee to support the proposition that once initial onus is discharged, Revenue must make further inquiries before treating receipts as unexplained.	Cited by the assessee and considered by the CIT(A); the High Court recorded the reliance but ultimately found the AO's inferences warranted given the evidence of unserved notices and other factual pointers.
Gupta Citi Shelters Ltd. v. CIT (Division Bench extract quoted)	Authority stating that after the assessee furnishes evidence, the initial onus is discharged and the AO must make further inquiries; absence of such inquiries weakens Revenue's case.	The assessee relied on this extract before the Court; the High Court recorded the reliance but found the totality of factual circumstances here supported the AO's action.

Court's Reasoning and Analysis

The Court's analysis proceeded by first recounting the factual findings of the AO: the AO noted that notices under Section 133(6) sent to several share applicants were returned unserved; the assessee did not produce the directors of those investors when asked; the investors' filed returns showed very small incomes; and large amounts were transferred into the investor accounts prior to issuance of cheques to the assessee. On that factual matrix the AO treated the share application money of Rs. 4.34 crores as unexplained cash credits under Section 68 and initiated penalty proceedings under Section 271(1)(c).

The CIT(A) and the ITAT, however, accepted the assessee's position that it had discharged the initial burden by producing documents establishing identity (PAN, addresses, bank statements, ROC materials), and relied on judicial authorities (notably Dwarkadhish Capital and Lovely Exports) for the proposition that once identity and genuineness are established, the onus shifts to the Revenue.

This Court accepted the legal principle articulated in Lovely Exports (the "shifting onus" rule) but emphasized that the principle does not preclude the Revenue from making legitimate and logical inferences based on the information available in the assessment proceedings. The Court observed that the information furnished by the assessee must be credible and verifiable. Where, as here, five of the share applicants could not be served at the addresses given, and the AO observed other material (meagre declared incomes of the applicants and large transfers into their accounts just before cheques were issued to the assessee), the Court found that such circumstances justified adverse inferences and further enquiry by the AO.

On the facts — immediate infusion of share capital at high premiums in the assessee's first year, large aggregate amount of Rs. 4.34 crores, returned notices, absence of directors, and the observed transactional pattern — the Court concluded that the CIT(A) and the ITAT erred in holding that the AO could not add back the amount under Section 68. The Court thus reversed the concurrent orders of the lower authorities.

Holding and Implications

Holding: Appeal allowed.

Implications:

The Court answered the question of law in favour of the Revenue and against the assessee: the AO's addition of Rs. 4,34,00,000 under Section 68 is upheld by this Court's decision to allow the Revenue's appeal.
Direct effect: the deletion made by the CIT(A) and upheld by the ITAT is set aside, thereby validating the AO's addition in the assessment for AY 2007-08.
The Court recognized the legal rule from Lovely Exports (shifting of onus) but clarified — on the facts of this case — that the Revenue is entitled to draw legitimate inferences and to require verifiable and credible particulars; if the material indicates cause for suspicion (e.g., unserved notices, low declared incomes of applicants, suspicious transfers), the AO may proceed to treat amounts as unexplained and add them under Section 68.

Note: This summary is prepared strictly from the content of the provided opinion and does not add or infer facts or authorities beyond those explicitly cited in the text.

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Cit v. Ultra Modern Exports Pvt. Ltd.

MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)

1. The Revenue is in appeal, aggrieved by the order of the ITAT dated 14.06.2011 in ITA-87.del/2011. The question of law urged is:-

“Whether on the facts and circumstances of the case, the ITAT could have deleted the entire addition of Rs. 4,34,00,000/-, citing the reason that the AO has not doubted the identity of the share applicants and by placing reliance on the decision of the Apex Court in the case of Lovely Exports Pvt. Ltd. besides other cases like Girdhari Lal v. Commissioner Of Income Tax, 261 TR 736?”

2. The facts necessary for deciding this case are that for AY 2007-08, the AO held that the assessee had received Rs. 4,34,00,000/- as unexplained credit in the form of share application money from 9 applicants. After considering the materials on record, including the documentary evidence furnished by the assessee such as PAN numbers, detailed particulars of the addresses, audited accounts and bank statements of the share applicants etc. and lastly the return of allotment filed by the assessee with the ROC, the AO was of the opinion that the burden which was primarily upon the assessee had not been discharged in explaining adequately the source of the said amount. The same was accordingly added back.

3. The assessee feeling aggrieved appealed to the CIT (A) which after considering the records and submissions and taking note of the applicable precedents, particularly, Commissioner Of Income Tax-Iv v. M/S. Dwarkadhish Capital (P) Ltd….) Ltd.330 ITR 298, proceeded to hold as follows:-

“4. I have verified the copies filed as on 15.10.2010 which include certificate with regard to share application, bank statement showing the name of the assessee company, copy of income tax returns, copy of the audited balance sheet and copy of additional information as required under Companies Act in all the five cases. In this regard ld. AR has relied on various judgments of the Hon'ble S.C as under:-

a) CIT v. G.P International Ltd.(2010) 325 ITR 25 (P&H)

b) CIT v. Orbital Communication Pvt. Ltd.(2010) 327 ITR 560 (Delhi)

c) Commissioner Of Income Tax-Iv v. M/S. Dwarkadhish Capital (P) Ltd….) Ltd.(2010) 194 Taxman 43 (Delhi)

d) CIT v. Lovely Exports (P) Ltd.(2009) 319 ITR (St.) 5 (SC).

Assessee's reliance on the above mentioned case laws is appreciated. In the latest judgment in the case of Commissioner Of Income Tax-Iv v. M/S. Dwarkadhish Capital (P) Ltd….) Ltd.(2010) 194 Taxman 43 (Delhi), the Hon'ble Delhi High Court has held as under:-

“Though in s. 68 proceedings, the initial burden of proof lies on the assessee yet once he proves the identity of the creditors by either furnishing their Pan or income-tax assessment number and shows the genuineness of transaction by showing money in his books either by account payee cheque or by draft or by any other mode, then the onus of proof would shift to the Revenue-just because the creditors/share applicants could not be found at the address given, it would not give the Revenue the right to invoke s. 68 - Revenue has all the power and wherewithal to trace any person - Moreover, it is settled law that the assessee need not to prove the ‘source of source’ - In the instant case, the tribunal has confirmed the order of the CIT (A) deleting the impugned addition holding that the assessee has been able to prove the identity of the share applicants and the share application money has been received by way of account payee cheques - No question of law arise.”

The ratio of the case law in the case of Commissioner Of Income Tax-Iv v. M/S. Dwarkadhish Capital (P) Ltd….) Ltd. clearly hits the instant case as the AO has formed his opinion of addition on the basis of the fact that some letters issued u/s. 133(6) of the IT Act were returned back. However, assessee has fully satisfied the identity, capacity and creditworthiness of the share applicant.

4.1 The AO has not doubted the identity of the share applicants which is stated to be the main parameter to be discharged by the assessee in respect of share application money/share capital received as held recently by the judicial for all over the country.

4.2 It is settled principle of law that no addition/disallowance can be made on suspicion, surmises and conjectures as held by the Hon'ble Supreme Court in the following cases:-

a) Girdhari Lal v. Commissioner Of Income Tax, 26 ITR 736

b) Omar Salay Mohammed Sait v. CIT, 37 ITR 151

c) Dhakeshwari Cotton Mills Ltd. v. CIT, 26 ITR 775

d) Lal Chand Bhagat Ambica Ram v. CIT, 37 ITR 288

4.3 In the case of Acchyalal Shaw v. ITO, (2009) 30 SOT 44 (Kol) (URO), the Hon'ble ITAT observed as under:-

“Suspicion cannot replace evidential document. Simple argument or allegation of manipulation is not sufficient without proper evidence.”

4.4 In view of the above discussion, I am of the considered view that addition amounting to Rs. 4,34,00,000/- is misconceived, hence deleted and the appeal of the appellant is allowed”

4. The Revenue's appeal was rejected by the ITAT which held as follows:-

“6. We have heard the rival contentions in the light of the material produced and precedent relied upon. We find that in this case the assessee has furnished the basic information in this regard. These were certificate with regard to share application, bank statement showing the name of the assessee company, copy of income tax returns, copy of the audited balance sheet and copy of addition information as required under the Companies Act in all the five cases. Thus, the identity of these share applicants is duly established. The Assessing Officer has also not disputed the identity of share applicants. In these circumstances, Hon'ble Apex Court decision in the case of C.I.T v. Lovely Exports P Ltd., (216 CTR 195) is relevant. In this case, it was held that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the Department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as undisclosed income of the assessee.

7. In the background of the aforesaid discussion and precedent, in our considered opinion, there is no illegality or infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence, we uphold the same.”

5. Learned counsel for the Revenue submits that the assessee had sought for share application amounts in the very first year of its functioning and claimed premium ranging between Rs. 90-190 per share. Nine share applicants had invested huge amounts. Upon enquiry, 5 out of 9 notices issued to the applicants under Section 133(6) were returned unserved. Furthermore, the materials on record in the form of the returns of income of the share applicants furnished by the assessee disclosed that the applicants had very meager income; in these circumstances, the AO was justified in deducing that Rs. 4.34 Crores was unexplained cash credit liable to be treated as such and added back under Section 68.

6. Counsel for the assessee argued that this Court should sustain the concurrent orders of the CIT (Appeals) and the Tribunal. It was submitted that the decision of the Supreme Court in Commissioner Of Income Tax v. Lovely Exports Private Limited. 195 only requires that the assessee should, in order to discharge the onus which falls upon it in the first instance whenever Section-68 is sought to be invoked, furnish such materials as are necessary and in its possession. This would be in the form of proof of identity of the share applicants, its PAN, addresses, materials evidencing its existence such as relevant extracts of the ROC register or returns etc. Once this burden is discharged, the onus shifts back to the AO who has to then in order to dislodge the burden make further enquiries and satisfy himself that indeed the amount is to be added back under Section 68.

7. Learned counsel for the assessee submitted that by furnishing addresses and other particulars such as PAN and ROC certificate/documents, the assessee had in fact discharged its burden. The fact that some of the notices were returned back unserved could not adversely affect its position. In this regard, learned counsel relied upon the decision reported as Commissioner Of Income Tax… v. Divine Leasing & Finance Ltd.….(2008) 299 ITR 268 (Del) and Commissioner Of Income Tax-Iv v. M/S. Dwarkadhish Capital (P) Ltd….) Ltd. (supra). Learned counsel also relied upon the judgment of the Division Bench of this Court in Gupta Citi Shelters Ltd. v. CIT, especially the following extracts:-

“The entire case of the Revenue based on the plea that as per the report, the investing companies were not found at the given addresses and on this basis, argument is raised that the companies are non-existing and the transactions were bogus and not genuine. Here, the case of the Revenue is even weaker than the cases discussed above. It is not even the case that the Directorate of Income Tax (Investigation) has found Mr. Mahesh Garg in such racket of floating bogus companies. We state at the cost of repetition that after the assessee had furnished the evidence, initial onus had been discharged and it was for the AO to make further necessary inquiries which are completely missing.”

8. The AO in this case while proceeding to add back the sum of Rs. 4.34 Crores reasoned as follows:-

“3.3 Therefore, to verify the source of fund so invested by other entities in the assessee company, Notice u/s 133(6) sent to above entities for calling the information and their existences. But the Notices were received back unserved from the addresses provided by the AR. Accordingly, vide order sheet entry dated 17/12/2009 the AR was asked that “You have given the details of investors during the assessment proceedings but Notices u/s 133(6) sent to these entities for calling the information, received back unserved from the most of the addresses provided by you. Please explain and produce the Directors of these entities. In reply to the above query, AR filed letter dated 21/12/09 and replied that all the subscribers are private limited companies duly incorporated under the provisions of Companies Act, 1956, having a distinct, separate and legal identity whereby the existence of identity of the person is comprehensively and conclusively proved. The confirmation would provide adequate and sufficient proof/evidence in respect of identity, creditworthiness and genuineness of all persons from whom Share Application Money had been received.”

Notices u/s 133(6) were sent to investors out of which Notices sent to below mentioned entities are received back as unserved.

S. No. Name of the Investor Amount invested (Rs.)

1 Fairdeal Information & Technology Pvt. Ltd. 10000000

2 Sunlight Tour & Travels Pvt. Ltd. 15400000

3 Jagdishwar Pharmaceuticals Ltd. 5500000

4 Impala Industrial Enterprises Ltd. 5500000

5 Supreme Telecom & Network India Pvt. Ltd. 7000000

__________

Total Rs. 43400000

____________

3.4 Therefore, the AR was specifically asked to produce the Directors of above mentioned investors but the same were not produced. It has been noticed from the details filed by the AR that the investors are declaring very small income in their Return of Income and further noticed that before issue of cheque to M/s Ultra Modern Exports Pvt. Ltd. Huge amounts are being transferred in its accounts. Therefore it could not be said that creditworthiness of these investors were proved. Keeping in view the above facts and discussions, I have no option but to treat the Share Capital amount of Rs. 4,34,00,000/- as unexplained cash credits and added back to the income of the assessee company. Since the assessee has furnished inaccurate particulars of income, penalty proceedings u/s 271(1)(c) is being initiated separately.”

9. As noticed previously, the CIT (A) was of the opinion that the assessee had discharged the basic onus which was cast upon it after considering the ruling in Lovely Exports matter (supra). The material and the records in this case show that notice issued to the 5 of the share applicants were returned unserved. The particulars of returns made available by the assessee and taken into consideration in paragraph 3.4 by the AO in this case would show that the said parties/applicants had disclosed very meager income. The AO also noticed that before issuing cheques to the assessee, huge amounts were transferred in the accounts of said share applicants. This discussion itself would reveal that even though the share applicants could not be accessed through notices, the assessee was in a position to obtain documents from them. While there can be no doubt that in Lovely Exports (supra), the Court indicated the rule of “shifting onus” i.e the responsibility of the Revenue to prove that Section 68 could be invoked once the basic burden stood discharged by furnishing relevant and material particulars, at the same time, that judgment cannot be said to limit the inferences that can be logically and legitimately drawn by the Revenue in the natural course of assessment proceedings. The information that assessee furnishes would have to be credible and at the same time verifiable. In this case, 5 share applicants could not be served as the notices were returned unserved. In the backdrop of this circumstance, the assessee's ability to secure documents such as income tax returns of the share applicants as well as bank account particulars would itself give rise to a circumstance which the AO in this case proceeded to draw inferences from. Having regard to the totality of the facts, i.e, that the assessee commenced its business and immediately sought to infuse share capital at a premium ranging between Rs. 90-190 per share and was able to garner a colossal amount of Rs. 4.34 Crores, this Court is of the opinion that the CIT (Appeals) and the ITAT fell into error in holding that AO could not have added back the said amount under Section 68. The question of law consequently is answered in favour of the Revenue and against the assessee.

10. The Appeal is accordingly allowed.

Cit v. Ultra Modern Exports Pvt. Ltd.

Structured Summary of the Opinion (S. Ravindra Bhat, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's Arguments

Assessee's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Cit v. Ultra Modern Exports Pvt. Ltd.

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