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  • Shri S. S. Kemkar
  • Shri S. K. Seth
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  • Shri S. S. Kemkar
  • Shri S. K. Seth
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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This appeal under section 260A of the Income-tax Act, 1961 challenges the order dated May 10, 2010 of the Income-tax Appellate Tribunal, Indore Bench in IT(SS)A Nos. 259.Ind/2008 and 260.Ind/2008 (assessment years 2000-01 and 2002-03).

Relevant procedural and factual points drawn from the opinion:

  • A search and seizure operation was carried out under section 132(1). Consequent thereto the respondent (assessee) was served with a notice under section 153C read with section 153A on May 24, 2004 (the Tribunal notes service as June 3, 2004 in its narration).
  • The assessee had originally filed a return showing loss of Rs. 22,91,022 (filed November 30, 2000) and again filed the same return after receipt of the section 153C/153A notice. At another place the opinion states the assessee filed a return declaring total income as Rs. nil.
  • During assessment proceedings the Assessing Officer examined share application money received by the assessee and made additions under section 68, disbelieving affidavits submitted in support of the identity/source of subscribers. An addition of Rs. 1,59,300 (and references to Rs. 15,31,200 in the material supplied by the assessee) is recorded in the proceedings.
  • The assessee appealed to the Commissioner of Income-tax (Appeals), Indore, who dismissed the appeal by order dated September 18, 2008.
  • The assessee then appealed to the Tribunal which, by the impugned order dated May 10, 2010, allowed the appeal and deleted the addition under section 68. This departmental appeal under section 260A challenges the Tribunal's decision.

Legal Issues Presented

  1. Whether the additions made by the Assessing Officer under section 68 on account of alleged bogus share application money were justified where the assessee produced notarized affidavits and confirmations establishing the identity and source of the share subscribers.
  2. Whether, after the assessee establishes identity and source of share application money, the onus shifts to the Revenue to prove that the share applicants are bogus or that the impugned money actually belongs to the assessee.
  3. Whether the Tribunal was in error for not following the principle in CIT v. Rathi Finlease Ltd. (that the onus is on the assessee to establish genuineness of credits), and whether the appellant (Revenue) lacked an opportunity to controvert the affidavits.

Arguments of the Parties

Appellant's Arguments (Revenue)

  • The Tribunal erred in not correctly applying the legal principle in CIT v. Rathi Finlease Ltd., which places the onus on the assessee to establish genuineness of credits.
  • No opportunity was afforded to the appellant to controvert the affidavits submitted by the alleged subscribers.

Respondent's/Assessee's Position (as reflected in the record and Tribunal's summary)

  • The assessee filed a list of nine shareholders and produced notarized affidavits/confirmations containing name, address, age, source of income, annual income, date of share application, number of shares and amounts, to establish identity and source of funds.
  • The Assessing Officer did not cross-examine or otherwise verify the deponents of the affidavits despite apparent apprehension; the affidavits were not disapproved by the Assessing Officer.
  • Once identity and source of the subscribers are established, the assessee contended that no addition can be made under section 68 and any grievance against the individual shareholders can be pursued by the Revenue by reopening their individual assessments, but it cannot be treated as undisclosed income of the company.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. Rathi Finlease Limited [2008] 215 CTR (MP) 429 The principle that the onus is on the assessee to establish the genuineness of credits. The Tribunal noted this decision but held that in the present case the assessee had discharged that onus by proving identity and source; the higher court observed the Tribunal had taken this precedent into account.
Mehta Parikh & Co. v. Commissioner Of Income Tax, Bombay [1956] 30 ITR 181 (SC) Affidavits sworn before an authority carry authenticity and become unchallengeable in certain contexts. The Tribunal relied on this apex court authority to support the view that duly sworn affidavits/confirmations could not be summarily discarded and that the Assessing Officer should have cross-examined deponents if he doubted authenticity.
Commissioner Of Income-Tax v. Shiv Prakash Aggarwal [2008] 306 ITR 324 (Delhi) Authority reinforcing the evidentiary value of affidavits/confirmations in such matters (as cited). The Tribunal treated this decision as fortifying its view that the affidavits filed carried weight and were not properly disapproved by the Assessing Officer.
Commissioner Of Income Tax v. Lovely Exports Private Limited [2008] 216 CTR (SC) 195; [2009] 319 ITR (St.) 5 Where share application money is from alleged bogus shareholders, the Department may proceed against those shareholders individually but cannot treat the amounts as undisclosed income of the company. The Tribunal used this Supreme Court authority to support deletion of the addition in the hands of the company and to indicate that departmental remedy lies against individual shareholders, not as company income.
CIT v. Divine Leasing and Finance Limited, General Exports and Credit Limited and Lovely Exports Private Limited [2008] 299 ITR 268 (Delhi) The Assessing Officer has the duty to investigate the creditworthiness of shareholders; if the assessee proves genuineness, no addition under section 68 can be made. The Tribunal relied on this Delhi High Court decision to hold that having proved the identities and sources, the assessee was entitled to deletion of additions under section 68.
Shree Barkha Synthetics Ltd. v. Assistant Commissioner Of Income-Tax [2006] 283 ITR 377; 155 Taxman 289 (Raj) Support for the principle that once confirmation letters/affidavits are filed proving investor identity, additions under section 68 are not sustainable. The Tribunal cited this decision as supportive authority for deleting the section 68 addition once confirmations were on record.
CIT v. G.P International Limited [2010] 325 ITR 25 (P&H) Listed among cases supporting the assessee's position (as cited in the opinion). Referenced by the Tribunal as one of several decisions that support the view that proof of identity/source negates addition under section 68.
CIT v. Steller Investment Limited [1991] 192 ITR 287 Listed among earlier authorities supporting the assessee's stance (as cited). Used by the Tribunal as part of a body of supporting decisions favouring the assessee when identity/source is proved.
Sophia Finance Limited [1994] 205 ITR 98 (Delhi) Listed among decisions supportive of the assessee's case (as cited). Referred to by the Tribunal as additional precedent aligning with the conclusion that proof of identity/source prevents addition under section 68.

Court's Reasoning and Analysis

The court's reasoning follows the internal steps below, as reflected in the opinion:

  1. The Tribunal considered the documentary evidence placed on record by the assessee — specifically a list of nine shareholders and notarized affidavits/confirmations giving particulars such as name, address, age, source of income, date of application, number of shares and amount paid. The Tribunal observed that these documents established the identity and source of the credits claimed by the assessee.
  2. The Assessing Officer had doubted the affidavits observing similar handwriting and varying signatures, and considered the subscribers as dummy persons; on that basis additions under section 68 were made. The Tribunal noted that the Assessing Officer did not disapprove the contents of the affidavits by cross-examination or other verification measures.
  3. The Tribunal applied precedents: it acknowledged the general principle (from the jurisdictional High Court in Rathi Finlease) that the onus is on the assessee to prove genuineness, but found that here the assessee had discharged that onus by proving identity and source of the subscribers. It relied on Mehta Parikh to emphasize the authenticity and effect of sworn affidavits, and on decisions of the Delhi High Court and the Supreme Court (including Lovely Exports) to conclude that once identity/source are established, the Revenue must take action against individual shareholders if it considers them bogus rather than treating amounts as undisclosed income of the company.
  4. The Tribunal concluded that in the absence of further steps by the Assessing Officer to test the affidavits (for example by cross-examining deponents or initiating inquiries), there was insufficient basis to treat the amounts as company income and sustain additions under section 68.
  5. The Tribunal also dealt with charging of interest under section 243B as consequential: since the substantive addition was deleted, interest charged purportedly for that addition could not stand (the Tribunal characterized charging of interest as consequential and not leviable where the primary addition was deleted).
  6. On departmental appeal the court below (the present opinion) considered the Revenue's contention that the Tribunal erred in approach, but noted the Tribunal had expressly considered Rathi Finlease and other authorities and nevertheless concluded that the assessee had discharged its onus. The appellate court found no substantial question of law arose from the Tribunal's findings and reasoning.

Holding and Implications

Holding:

The appeal is dismissed.

Implications and direct consequences as recorded in the opinion:

  • The Tribunal's order deleting the addition under section 68 (in respect of share application money) is upheld.
  • Charging of interest under section 243B was treated as consequential; since the substantive addition was deleted, interest purportedly charged in relation to that addition was held not leviable/chargeable.
  • The court recorded that no substantial question of law arises from the Tribunal's decision, and accordingly dismissed the departmental appeal. The opinion does not purport to lay down a new precedent; it applies existing authorities to the facts before it.

This summary is strictly confined to the content and reasoning contained in the provided opinion. No information has been added beyond the text of that opinion.

Show full summary ...

    Commissioner Of Income-Tax v. Stl Extrusion P. Ltd.

    1. Shri R.L Jain, learned senior counsel with Ms. Veena Mandlik, learned counsel for the appellant.

    2. Heard on the question of admission.

    3. This is an appeal under section 260A of the Income-tax Act, 1961 challenging the order dated May 10, 2010 passed by Income-tax Appellate Tribunal, Indore Bench (for short “the Tribunal”) in IT (SS) A. Nos. 259.Ind/2008 and 260.Ind/2008 bearing assessment years 2000-01 and 2002-03.

    4. The brief facts necessary for disposal of this appeal are that on the basis of search and seizure operation carried out under section 132(1) the respondent was served with a notice under section 153C read with section 153A of the Income-tax Act on May 24, 2004. The assessee filed its return of income declaring total income as Rs. nil. The case was picked up for scrutiny and notice under section 143 of the Act was served upon the assessee. The respondent/assessee appeared before the Assessing Officer.

    5. The Assessing Officer on consideration of the contention raised by the assessee in respect of share application money received by the assessee during the relevant year found that the assessees had received share application money from a few persons who are not assessed to Income-tax and PAN was not mentioned. The Assessing Officer disbelieved the affidavits filed by the said persons observing that the signatures made on the same page of the deponents differ.

    6. Aggrieved the respondent filed an appeal before the Commissioner of Income-tax (Appeals), Indore. The Commissioner vide order dated September 18, 2008 dismissed the appeal filed by the respondent.

    7. The said order was challenged by the respondent before the Tribunal. The Tribunal by the impugned order dated May 10, 2010, allowed the appeal of the respondent by observing thus:

    “3. We have considered the rival submissions of learned representatives of both, sides and perused the material available on record. Ground No. 1 is, general in nature, therefore, requires no deliberation from our side. For ground No. 2 the brief facts are that the assessee-company is engaged in the business of manufacturing and trading of PVC rigid pipes, originally filed its return of loss of Rs. 22,91,022 on November 30, 2000. A search under section 132 was carried out at the premises of the assessee-company on October 8, 2003. Consequent to search, a notice under section 153C read with section 153A was served upon the assessee on June 3, 2004 to which the assessee again filed the return of loss, i.e, Rs. 22,91,022 as originally filed. During the assessment proceedings the assessee was asked about the details of increase in share capital of the assessee to which the assessee filed a list containing nine share holders from whom the share capital of Rs. 1,59,300 and Rs. 15,31,200 was received. The assessee also filed confirmation from the subscribers through duly notarized affidavits containing, the details like name, address, age, source of income, annual income, date of purchase of application of share tendered, number of shares purchased along with the amount given by subscribers. On receipt of these confirmations, neither anything was asked from the assessee nor any inquiry was made. The addition of Rs. 1,59,300 was made by the Assessing Officer by observing as under:

    ‘On a perusal of the submission made by the assessee in respect of share application money received by the assessee during the year. It is seen that in respect of the following persons the assessee has received share application money in cash. These persons are not assessed to Income-tax and PAN are not mentioned. On a perusal of the affidavits filed, it is seen that all the affidavits are in the handwriting of one person. It is also noticed that even on the same page the signatures of the deponent differs. It is quite unlikely that when a person is applying for huge amounts such as Rs. 5,00,000 or more is not assessed to tax. Hence considering the above, the names of the persons are not genuine and it is the unexplained money of the assessee, which is introduced by the assessee-company under the name of Page: 272share application money. These persons appear to be dummy persons and hence the entire amount of the share application money is considered as bogus share application money. The assessee-company has not proved the genuineness of such person also not proved their capacity to apply for such huge amount. These are dummy and the assessee-company has introduced its own money as share application money.’

    4. On appeal, the learned appellate authority by following the decision of the hon'ble jurisdictional High Court in the case of CIT v. Rat hi Finlease Limited, [2008] 215 CTR (MP) 429 to the effect that onus is on the assessee to establish the genuineness of the credits, affirmed the stand of the Assessing Officer which is under challenge before the Tribunal. We have found that the impugned addition under section 68 of the Act has been made by the learned Assessing Officer by suspecting that the share application money is bogus without appreciating the facts and the contents of the affidavit have not been disapproved. Thus, the undisputed fact is that the assessee has proved the identity of the subscribers with the help of affidavits which were not found to be bogus or false. An affidavit is not a mere piece of paper rather it carried its authenticity as the contents of the same are duly sworn before a Magistrate or a Notary Public/Oath Commissioner, as the case may be. During signing of these affidavits, the deponent, appears before the person before whom they are sworn and their signatures are duly taken on the register maintained by such Notary Public. If the Assessing Officer was apprehensive on the authenticity of such affidavit, nothing prevented him to cross-examine the deponents and to verify the contents of such affidavits but that was not done in the present appeals. Therefore, in view of a decision of the hon'ble apex court in the case of Mehta Parikh & Co. v. Commissioner Of Income Tax, Bombay The reference appears to be to [1956] 30 ITR 181 (SC) (supra), these affidavits become unchallengeable. The ratio laid down by the hon'ble Delhi High Court in the case of Commissioner Of Income-Tax v. Shiv Prakash Aggarwal, [2008] 306 ITR 324 (relevant page 326) further fortifies our view. As far as the reliance of the Revenue upon the decision from the hon'ble jurisdictional High Court in the case of CIT v. Rathi Finlease Limited, [2008] 215 CTR (MP) 429 to the extent that the assessee has to establish the genuineness of the credits, we are in full agreement with the argument but in the present appeal the assessee has duly established the identity, source of the credits. Even it is not the case that the shares have been issued to non-existing persons. Page: 273Broadly we are of the view that once the identity and source of the subscribers is established for making share application, no addition can be made under section 68 of the Act because even the hon'ble apex court in the case of Commissioner Of Income Tax v. Lovely Exports Private Limited. even stepped ahead by concluding as under [2008] 216 CTR (SC) 195; [2009] 319 ITR (St.) 5:

    ‘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-company.’

    Our view is further fortified by the decision of the hon'ble Delhi High Court in CIT v. Divine Leasing and Finance Limited, General Exports and Credit Limited and Lovely Exports Private Limited, [2008] 299 ITR 268 (Delhi) wherein it was held that it is the duty of the Assessing Officer to investigate the creditworthiness of the shareholders and in view of the finding that the assessee proved the genuineness of shareholders no addition can be made under section 68 of the Act. In the present appeal, since the assessee has discharged its onus by proving the identity of subscribers and even otherwise had any suspicion still remained in his mind, nothing prevented him to initiate action as per the provisions of the Act. The existence of subscribers to share application is not in doubt as the assessee duly furnished their names, age, address, date of filing the application, number of shares for which respective applications were made, amount given and the source of income of the applicant. In view of these facts, we are of the considered opinion that there is no justification for making the impugned addition because once the existence of the investors/share subscribers is proved, the onus shifts on the Revenue to establish that either the share applicants are bogus or the impugned money belongs to the assessee-company itself. Once the confirmation letters are filed, no addition can be made on account of the share application money in the hands of the company. Our view finds support from the decision in Shree Barkha Synthetics Ltd. v. Assistant Commissioner Of Income-Tax, [2006] 283 ITR 377; 155 Taxman 289 (Raj). The cases like CIT v. G.P International Limited, [2010] 325 ITR 25 (P&H); 229 CTR (P&H) 86, CIT v. Steller Investment Limited, [1991] 192 ITR 287 and Sophia Finance Limited, [1994] 205 ITR 98 (Delhi) support the case of the assessee.

    4. As far as charging of interest under section 243B is concerned, it is argued to be consequential in nature. We have found that no specific section has been mentioned for charging of interest and merely it has been mentioned that charge interest if any, as per law. However, since, the issue of share application has been decided in favour of the assessee and the addition made under section 68 of the Act has been deleted, therefore, charging of interest is consequential in nature meaning thereby that it is not leviable/chargeable.”

    8. Shri R.L Jain learned senior counsel for the appellant argued that the Tribunal has committed error in not considering the law laid down by this court in the case of CIT v. Rathi Finlease Ltd., [2008] 215 CTR 429 (MP) in which it has been laid down that the onus is on the assessee to establish the genuineness of the credits. He also argued that no opportunity was available to the appellant to controvert the affidavits.

    9. Having considered the contention of the appellant we find that the Tribunal has taken note of the judgment of this court in the case of CIT v. Rathi Finlease Ltd., [2008] 215 CTR 429 (MP) as also the various judgments of the Supreme Court as well as the Delhi High Court and has held that though it is the duty of the assessee to establish the genuineness of the credits but in the present case the assessee has duly established the identity and source of credits. The Tribunal has also held that once the identity and source of the subscribers of the shares is established no addition can be made under section 68 of the Income-tax Act. The assessee having duly furnished the names, age, address, date of filing the application of share, number of shares of each subscriber there was no justification for the Assessing Officer for making the impugned addition because once the existence of the investors/share subscribers is proved, the onus shifts on the Revenue to establish that either the share applicants are bogus or the impugned money belongs to the assessee itself. We also find that after filing of the affidavits of the said subscriber the appellant at no stage of the proceedings sought any opportunity to rebut the said affidavits.

    10. Having regard to the aforesaid in our considered view no question of law much less substantial question of law arises in this appeal. Accordingly, the appeal fails and is hereby dismissed.

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    Commissioner Of Income-Tax v. Stl Extrusion P. Ltd.
    (Oct 25, 2010)