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Commissioner Of Inco... v. M/S. Peoples General...
Factual and Procedural Background
The Court issued a consolidated order deciding several appeals that raised similar questions of law based on substantially similar facts. The facts, taken from M.A.I.T No. 27/2008, are as follows.
- Return for the relevant year was filed on 13.10.2003 declaring nil income. The Assessing Officer (AO) passed an assessment order on 01.03.2006 assessing income at Rs. 21,27,50,403/-, by making an addition of that amount on the ground that the sum represented share subscription provided by M/s Alliance Industries Limited, Sharjah (a non-resident company).
- The AO doubted the creditworthiness of M/s Alliance Industries Limited and, applying section 68 of the Income-tax Act, treated the subscription amount as unexplained credit and added it to the assessee's income for the year (similar additions were made for three years).
- The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. In respect of most matters the CIT(A) allowed the appeal and deleted the addition; in I.T.A No. 90/2011 the CIT(A) sustained the addition. On further appeal, the Income Tax Appellate Tribunal (ITAT) dismissed the Revenue's appeals in M.A.I.T No. 27/2008 and I.T.A No. 89/2011; in I.T.A No. 90/2011 the ITAT directed deletion. Thus, the orders of CIT(A)/ITAT deleting the additions were under challenge by the Revenue before this Court.
- The AO's assessment reasoning emphasised that while identity and banking channel evidence were provided, the assessee failed to prove the financial capacity/creditworthiness of the non-resident investor and therefore the receipts could be treated as unexplained credit under section 68. The CIT(A) reversed that finding, accepting the identity of the investor, the banking channel evidence and prior acceptance of similar receipts in earlier assessment years.
Legal Issues Presented
- Whether, in the facts and circumstances of the case, the Tribunal was justified in affirming the decision of the CIT(A) deleting the addition made under section 68 of the Income-tax Act despite the fact that the assessee had failed to discharge its onus of proving capacity of the creditor who is a non-resident Indian (director of a foreign company and shareholder of the assessee company) and the genuineness of the transaction was not beyond doubt?
- Whether the Tribunal was justified in not extending and dealing with the additional grounds urged by the Revenue, though the same were germane to the lis?
- Re-framed question (03.11.2011): Whether the Income-tax Appellate Tribunal was correct in law in deleting the addition made by the Assessing Officer in respect of a non-resident company which admittedly had contributed share capital, even on the assumption that the assessee had failed to discharge the financial capacity of the NRI company?
Arguments of the Parties
Appellant (Revenue) — Principal Contentions
- The Assessing Officer had recorded cogent reasons for making the addition under section 68 on the ground that the creditworthiness of M/s Alliance Industries Limited, Sharjah was doubtful; once such a finding was recorded the same should not have been reversed in appeal.
- It was submitted that the Commissioner of Income Tax (Appeals) and the ITAT did not consider the matter from the correct perspective and their orders should be set aside with restoration of the AO's order.
- The Revenue relied on multiple High Court decisions to support its position, specifically citing:
- Commissioner Of Income Tax… v. Divine Leasing & Finance Ltd. (Delhi High Court) (2008) 299 ITR 268 (Del).
- Bhav Shakti Steel Mines P. Ltd v. Commissioner Of Income-Tax (Delhi High Court) (2010) 320 ITR 619.
- Amines Plasticizers Ltd. v. Commissioner Of Income-Tax (Gauhati High Court) (1997) 223 ITR 173 (Gau).
- Commissioner Of Income-Tax v. G.M Mittal Stainless Steel Ltd. (Indore Bench of this Court) (2004) 271 ITR 219 (MP).
- Commissioner of Income Tax v. Ruby Traders & Exporters Ltd. (Calcutta High Court) (2003) 263 ITR 300 (Cal).
Respondent (Assessee) — Principal Contentions
- The respondent supported the orders of the CIT(A) and the ITAT and relied principally on the decision of the Apex Court in Commissioner Of Income Tax v. Lovely Exports Private Limited (2008) 11 ITJ 357 (SC).
- The respondent's position, as articulated by senior counsel, was that where the identity of the company providing share subscription is established and the amounts flow through proper banking channels, the burden is not upon the assessee to prove the creditworthiness of such investor; on such facts an addition under section 68 treating the sum as undisclosed income of the assessee is not sustainable.
- It was also submitted that the identity of M/s Alliance Industries Limited, Sharjah was not disputed and therefore the AO's action of addition solely on the ground of creditworthiness was inconsistent with the principle in Lovely Exports; other High Courts had followed that view.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court in this Opinion |
|---|---|---|
| Commissioner Of Income Tax v. Lovely Exports Private Limited (2008) 11 ITJ 357 (SC) | Held that if share application money is received from alleged bogus shareholders whose names are given to the AO, the Department may proceed against those shareholders but the amount cannot be regarded as undisclosed income of the assessee under s.68; establishes that if identity is proved the burden to prove creditworthiness is not upon the assessee in that context. | The Court treated Lovely Exports as controlling. The Court applied its principle that once the identity of the investor is established and the transaction is shown through banking channels, the department cannot treat the receipt as undisclosed income of the assessee merely because the AO doubts the investor's creditworthiness; accordingly the Court dismissed the Revenue's appeals relying on that precedent. |
| Commissioner of Income Tax v. Ruby Traders & Exporters Ltd. (2003) 263 ITR 300 (Cal) | Applied by the AO as authority for treating unexplained credits as income under section 68 where the financial capacity of the investor is not proved. | The AO relied on Ruby Traders to treat the subscription as unexplained credit; the opinion records this reliance but ultimately places Ruby Traders in the context of being distinguishable or subordinate to the Apex Court's holding in Lovely Exports for present facts. |
| Commissioner Of Income Tax… v. Divine Leasing & Finance Ltd. (Delhi High Court) (2008) 299 ITR 268 (Del) | Held that where subscriptions are received through banking channels and complete details of shareholders are furnished, addition under s.68 is not warranted in absence of positive material that shareholders are benamidars or fictitious. | The Court referenced Divine Leasing as an example of High Court decisions that followed the reasoning in Lovely Exports and supported the view that identity/banking channel evidence suffices to reject an addition under s.68 in the absence of positive contrary material. |
| Bhav Shakti Steel Mines P. Ltd v. Commissioner Of Income-Tax (2010) 320 ITR 619 (Del) | Cited by the Revenue (as a High Court decision addressing issues relating to cash credits/ unexplained credits). | The opinion records that the Revenue relied on this and similar High Court decisions, but notes that many of those decisions pre-date Lovely Exports and that the Apex Court's ruling is binding. |
| Amines Plasticizers Ltd. v. Commissioner Of Income-Tax (1997) 223 ITR 173 (Gauhati) | Cited by the Revenue to support the assessing officer's approach to unexplained credits under s.68. | Recorded as relied upon by the Revenue; the Court regarded such precedents as preceding the Apex Court decision in Lovely Exports and therefore not decisive against the controlling Supreme Court authority. |
| Commissioner Of Income-Tax v. G.M Mittal Stainless Steel Ltd. (2004) 271 ITR 219 (MP) | Cited by the Revenue in support of the addition under s.68 where creditworthiness/ financial capacity was doubted. | Recorded as relied upon by the Revenue; the Court noted these authorities were antecedent to Lovely Exports and did not override the Supreme Court's pronouncement. |
| Godavari Corporation Limited (reported at 156 ITR 835) | Principle that similar cash credit accepted as genuine in an earlier year ought to be accepted in a subsequent year. | The CIT(A) relied on Godavari Corporation to support acceptance of the deposit as genuine because similar deposits from the same investor were accepted in earlier assessment years; the Court records and considers this reliance in assessing the factual matrix. |
| H.A. Saha & Company v. CIT (reported at 30 ITR 618) | Authorities cited by the CIT(A) for the proposition that earlier acceptance of similar receipts supports acceptance in the subsequent year. | The CIT(A) relied on this decision; the Court records the reliance as part of the CIT(A)'s factual conclusion that the earlier acceptance militated against a different view in the year under appeal. |
| CIT v. Hindustan Motors (reported at 92 ITR 619) | Observation cited by the CIT(A) supporting acceptance of similar transactions over years. | The CIT(A) cited this Calcutta High Court observation in support of accepting the deposit as genuine; the Court recorded this reliance when describing the CIT(A)'s reasoning. |
Court's Reasoning and Analysis
The Court proceeded by examining the undisputed factual matrix and the binding law. The analysis, in essence, followed these steps:
- The Court observed that the material facts relevant to the dispute (identity of the investor, banking channel evidence, prior acceptance of similar receipts in earlier assessment years) were not in dispute between the parties.
- The Court identified the controlling legal principle from the Apex Court's decision in Lovely Exports: where share application money is received and the identity of the shareholders is established (even if the Department alleges they are bogus), the Department may proceed against those shareholders in accordance with law but the receipt cannot automatically be treated as undisclosed income of the assessee under section 68.
- The Court noted that the judgments relied upon by the Revenue were decided prior to the Supreme Court's decision in Lovely Exports; therefore, those decisions could not displace the Apex Court's ruling on the question whether mere doubt as to creditworthiness permits treating the receipt as undisclosed income of the assessee.
- The Court also referred to subsequent High Court decisions (for example, Divine Leasing & Finance Ltd.) which applied the principle in Lovely Exports and held that receipt through proper banking channels together with disclosure of shareholder particulars usually negates making an addition under section 68 in the absence of positive material showing that shareholders were fictional or benamidars.
- Applying the Lovely Exports principle to the present facts — where the identity of M/s Alliance Industries Limited, Sharjah was not disputed, amounts had flowed through banking channels, and similar investments had been accepted as genuine in earlier years — the Court concluded that the substantial questions framed in these appeals did not require further consideration and that the Revenue's challenge could not prevail.
Holding and Implications
HOLDING: All the appeals filed by the Revenue were DISMISSED. The Court specifically held that, in view of the Supreme Court's decision in Lovely Exports, the substantial questions framed did not arise for consideration and the orders of the CIT(A) and the ITAT deleting the additions were not to be disturbed.
Implications:
- Direct effect on the parties: The additions made by the Assessing Officer of Rs. 21,27,50,403/- (and similar additions in the related matters) were upheld as having been rightly deleted by the CIT(A) and affirmed by the ITAT; the Revenue's appeals were dismissed. The Court ordered no costs ("dismissed with no order as to costs").
- Legal consequence: The Court applied the existing Supreme Court authority in Lovely Exports as dispositive of the legal question raised — namely, that proved identity of the investor and banking-channel transactions prevent treating the amounts as undisclosed income of the assessee under section 68, and the Department's remedy lies in proceeding, where appropriate, against the contributors themselves. The Court did not purport to lay down a new principle of law beyond following the Apex Court's precedent.
ORDER
Per Krishn Kumar Lahoti, Acting Chief Justice
This order shall decide all the aforesaid appeals involving similar questions of law, based on similar set of facts.
2. M.A.I.T No. 27/2008 was admitted on 03.07.2008 on the following substantial questions of law:-
“(i) Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified in affirming the decision of the CIT(A) deleting the addition made under section 68 of the Income Tax Act despite the fact that the assessee has failed to discharge its onus of proving capacity of creditor who is a nonresident Indian-Director of Foreign Company and share holder of Assessee Company and genuineness of transaction was not beyond doubt?
(ii) Whether the Tribunal was justified in not extending and dealing with the additional grounds urged by the Revenue, though the same were germane to the lis?”
Thereafter on 03.11.2011 question No. 1 was re-framed which reads as under:-
“(i) Whether the Income-tax Appellate Tribunal was correct in law in deleting the addition made by the Assessing Officer in respect of Non-resident Company, which admittedly has contributed share capital, even on the assumption that the assessee has failed to discharge the financial capacity of the NRI Company?”
3. I.T.A No. 89/2011 was admitted on 03.11.2011 on the following substantial questions of law:-
“(i) Whether the Income-tax Appellate Tribunal was correct in law in deleting the addition made by the Assessing Officer in respect of Non-resident Company, which admittedly has contributed share capital, even on the assumption that the assessee has failed to discharge the financial capacity of the NRI Company?
(ii) Whether the Tribunal was justified in not extending and dealing with the additional grounds urged by the Revenue, though the same were germane to the lis?”
4. I.T.A No. 90/2011 was admitted on 03.11.2011 on the following substantial questions of law:-
“(i) Whether the Income-tax Appellate Tribunal was correct in law in deleting the addition made by the Assessing Officer in respect of Non-resident Company, which admittedly has contributed share capital, even on the assumption that the assessee has failed to discharge the financial capacity of the NRI Company?
(ii) Whether the Tribunal was justified in not extending and dealing with the additional grounds urged by the Revenue, though the same were germane to the lis?”
5. As all the matters involve similar questions of law, based on similar set of facts, it would be appropriate if all the aforesaid matters are decided by this common order. For the convenience, facts are taken from M.A.I.T No. 27/2008.
6. In this case return was filed on 13.10.2003 in which income was declared as nil. The assessment order was passed on 01.03.2006 by which the Assessing Officer made an addition of Rs. 21,27,50,403/- and assessed the income of the respondent at Rs. 21,27,50,403/-. The aforesaid addition was made on the ground that one M/s Alliance Industries Limited, Sharjah had made share subscription to the capital of respondent. The assessing officer doubted creditworthiness of M/s Alliance Industries Limited, Sharjah and directed addition of the amount of share subscription provided by the aforesaid Company to the assessee. In all the three years, the amount of subscription was directed to be made addition in the income of the respondent.
7. Against the order passed by the assessing officer, an appeal was preferred before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) allowed the appeal and directed deletion of the addition. However, in I.T.A No. 90/2011, such addition was sustained by the CIT(A).
8. Against these orders, appeals were filed before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal dismissed the appeals of the Revenue in M.A.I.T No. 27/2008, I.T.A No. 89/2011, however, in I.T.A No. 90/2011 the ITAT directed deletion of the addition and similar order was passed in all the three cases, which are under challenge in these appeals.
9. Learned counsel appearing for the appellant submitted that the Assessing Officer by recording reasons rightly directed for addition of the amount of share subscription provided by M/s Alliance Industries Limited, Sharjah in the income of the respondent. The Assessing Officer had given cogent reasons but in the appeal the said order was wrongly set aside by the Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal. It was submitted that once it was established by the Assessing Officer that the creditworthiness of the Company providing share subscription amount was doubtful, then the aforesaid finding could not have been reversed in appeals. It is also submitted that the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal have not considered the matter in its proper perspective. He has placed reliance on the following judgments of the different High Courts:-
(i) Commissioner Of Income Tax… v. Divine Leasing & Finance Ltd.…. decided by Delhi High Court reported as (2008) 299 ITR 268 (Del);
(ii) Bhav Shakti Steel Mines P. Ltd v. Commissioner Of Income-Tax decided by Delhi High Court reported as (2010) 320 ITR 619;
(iii) Amines Plasticizers Ltd. v. Commissioner Of Income-Tax decided by Gauhati High Court reported as (1997) 223 ITR 173 (Gau);
(iv) Commissioner Of Income-Tax v. G.M Mittal Stainless Steel Ltd. decided by Indore Bench of this Court reported as (2004) 271 ITR 219 (MP); and
(v) Commissioner of Income Tax v. Ruby Traders & Exporters Ltd. decided by Calcutta High Court reported as (2003) 263 ITR 300 (Cal).
It is submitted that these appeals may be allowed and the orders passed by the Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal may be set aside and that of the Assessing Officer may be restored.
10. Shri C.S Agrawal, learned Senior Advocate appearing for the respondent supported the order passed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal and submitted that the controversy has been settled by the Apex Court in the Commissioner Of Income Tax v. Lovely Exports Private Limited., (2008) 11 ITJ 357 (SC) in which the Apex Court considering the question that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to AO, then 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 Company. It is further submitted that in the present case, the identity of the Company which had provided share subscription was not in dispute but the Assessing Officer had doubted the creditworthiness of the said Company and only on this ground, without disputing the identity of the said Company, had directed addition against the respondent, which in the light of the judgment of Apex Court in Lovely Exports (supra) is not sustainable. It is also submitted that the similar question has been decided by the other High Courts relying on the judgment of Apex Court in Lovely Exports.
11. In this case, before proceeding further it would be appropriate if the findings recorded by the Assessing Officer are looked into, which are identical in all the matters. The Assessing Officer held thus:-
“On going through the above details furnished by the assessee, it is clear that although they indicate the identity of the NRI Company and the mode of transfer of money to the assessee but evidently lack in proving creditworthiness of the NRI Company. The transactions shown by the assessee through the banking channels ipso facto do not establish the financial capacity of the NRI Company. Further, it cannot be said that a transaction, which takes place by way of cheque, is invariably sacrosanct. Furthermore, the permission received from the RBI by the assessee also does not prove the financial capacity of the assessee. Despite repeated and sufficient opportunities allowed to the assessee as mentioned supra, it has not proved the financial capacity of the aforesaid NRI Company with regard to the above investment of Rs. 21,27,50,403/- in share capital/premium during the year. As such, the above investment of Rs. 21,27,50,403/- remained to be proved and established as from a genuine source. Under the facts and in the circumstances of the assessee's case, provisions of section 68 of the I.T Act, 1961 are found clearly attracted and the ratio of the decision in the case of CIT v. Ruby Traders and Exporters Ltd.[2003] 263 ITR 300 (Cal) is found applicable.”
6. Considering the totality of facts of the case of the assessee and relying on the above case laws, it is found that the genuineness of claimed investment of Rs. 21,27,50,403/- towards share capital/premium, from M/s Alliance Industries 13Ltd., Sharjah, UAE, an NRI Company, in the assessee-company during the year has not been proved as the financial capacity of the above NRI Company was not proved/established by the assessee during the course of assessment proceedings despite due opportunity allowed to it. The alleged investment of Rs. 21,27,50,403/- is, therefore, treated as unexplained credit u/s 68 of the I.T Act, 1961 and added in computation of the total income of the assessee for A.Y 2003-04. The aforesaid unexplained credit of Rs. 21,27,50,403/- is treated as income from undisclosed sources and accordingly it is not entitled to set off of brought forward business loss/depreciation of earlier years. Penalty proceedings u/s 271(1)(c) for concealing the particulars of income/furnishing inaccurate particulars of income are initiated separately in this regard.”
12. The aforesaid findings were reversed by the Commissioner of Income Tax (Appeals) by the appellate order, by which the Commissioner of Income Tax (Appeals) held in para 5 thus:-
“5. I have very carefully considered the detailed submissions of the Ld. counsel as discussed above that Assessing Officer was not justified in making addition of Rs. 21,27,50,403/- on the ground that financial capacity of the NRI company was not proved/established by the appellant for making the investment. I have also very carefully perused the reasons given by the Assessing Officer for justifying his action for making addition of Rs. 21,27,50,403/- u/s 68 of the Income-tax Act, 1961. I have also given due considerations to the report of the Assessing Officer as submitted by him on fresh evidence placed before me during the course of appellant proceedings by the Ld. counsel for the appellant. After due consideration of the matter, I hold that Assessing Officer was not justified in making an addition of Rs. 21,27,50,403/- u/s 68 of the Income-tax Act, 1961 because appellant had fully discharged the burden cast upon it u/s 68 for explaining the deposit/investment receipt from M/s Alliance Industries Limited. I find that M/s Alliance Industries Limited is a NRI company having its Registered Office at Gibraltar and Management Head Office at Sharjah, UAE and this fact is not disputed by the Assessing Officer. Therefore, identity of the foreign investor is established beyond any doubt.”
“From the above, it is very much clear that amounts aggregating to Rs. 21,27,50,403/- have flowed to the appellant from the current account number 02570196101 of M/s Alliance Industries Limited at Sharjah through proper banking channel and it is the money of M/s Alliance Industries Limited that has come to the appellant and M/s Alliance Industries Limited had the capacity to invest this much of amount with the appellant during the F.Y 2002-2003. Thus, creditworthiness of M/s Alliance Industries Limited, also stands established. Since all the ingredients as are required to be satisfied for accepting the deposit as genuine u/s 68 are fulfilled in respect of this investment of Rs. 21,27,50,403/- by M/s Alliance Industries Limited, with the appellant company, in my considered view Assessing Officer was not justified in drawing adverse inference in respect of this amount under reference. Moreover, Assessing Officer had not brought on record any evidence. Otherwise that is to say that Assessing Officer had not established by making inquiry that it was appellant's own money which it had received in the shape of Dollars from the NRI company. Assessing Officer himself has accepted the identity of the share applicant company and also genuineness of transactions in respect of this deposit. I find that Assessing Officer himself had accepted the similar deposits in the earlier A. Yrs. 2001-2002 and 2002-2003 as genuine. In fact assessment order relating to A.Y 2001-2002 was passed after enquiry u/s 143(3) wherein similar investment from the same NRI company to the tune of Rs. 4,64,71,322/- was accepted as genuine and investment of Rs. 9,47,81,895/- from the same company was also accepted u/s 143(1) for the A.Y 2002-2003. Since there is no deviation in the facts of the investment this year vis-a-vis investments made by the same company with the appellant in earlier years as mentioned above, I do not find any justification for not accepting the deposit this year as genuine. Assessing Officer had not given any reason worthwhile for taking different view this year in respect of similar deposit as he had taken while accepting such deposits as genuine in the earlier assessment years. But he had taken the deposit this year as not genuine. I place reliance on the decision of Hon'ble High Court in case of Godavari Corporation Limited reported at 156 ITR 835 wherein the Hon'ble M.P High Court held that “similar cash credit having been accepted as genuine in the earlier year, the same explanation ought to have been accepted in the subsequent year”. I also place reliance on the decisions of Hon'ble Bombay High Court in case of H.A Saha & company v. CIT reported at 30 ITR 618 and also on the observation of Hon'ble Calcutta High Court in case of CIT v. Hindustan Motors reported at 92 ITR 619 on this issue.”
13. By recording aforesaid findings, the Commissioner of Income Tax (Appeals) reversed the order of the Assessing Officer and directed deletion of additions made in the matter. The ITAT affirmed the order of CIT(A) with similar reasoning.
14. In the light of the aforesaid factual position, the legal position may be looked into because the aforesaid factual position has not been disputed by the parties.
15. In Lovely Exports (supra) the Apex Court considering the question held thus:-
“2. Can the amount of share money be regarded as undisclosed income under s. 68 of IT 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 impugned judgment.”
16. The aforesaid judgment has been followed by all the Courts and the judgments relied on by the appellants relates to the period prior to the judgment in Lovely Exports. As the Apex Court has specifically held that if the identity of the person providing share application money is established then the burden was not on the assessee to prove the creditworthiness of the said person. However, the department can proceed against the said Company in accordance with law. The position of the present case is identical. It is not the case of any of the parties that M/s Alliance Industries Limited, Sharjah is a bogus company or a non-existent company and the amount which was subscribed by the said Company by way of share subscription was in fact the money of the respondent assessee. In the present case, the assessee had established the identity of investor who had provided the share subscription and it was established that the transaction was genuine though as per contention of the respondent the creditworthiness of the creditor was also established. In the present case, in the light of the judgment of Lovely Exports (P) Ltd., we have to see only in respect of the establishment of the identity of the investor. The Delhi High Court also in Divine Leasing & Finance Ltd. (supra), considering the similar question held that the assessee Company having received subscriptions to the public/rights issue through banking channels and furnished complete details of the shareholders, no addition could be made under section 68 in the absence of any positive material or evidence to indicate that the shareholders were benamidars or fictitious persons or that any part of the share capital represented company's own income from undisclosed sources. The similar view has been taken by the other High Courts.
17. As the Apex Court has considered the law in Lovely Exports (supra) and in view of law laid down by the Apex Court, we find that the substantial questions framed in these appeals do not arise for our consideration. Accordingly, all these appeals are dismissed with no order as to costs.
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