Commissioner Income Tax-V v. Nipuan Auto Pvt Ltd

THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 30.04.2013 +ITA 225/2013 COMMISSIONER INCOME TAX-V ..... Appellant versus NIPUAN AUTO PVT LTD ..... Respondent Advocates who appeared in this case:For the Appellant: Mr Sanjeev Rajpal, Advocate.For the Respondent: None. CORAM:-HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE VIBHU BAKHRU JUDGMENT BADAR DURREZ AHMED, J (ORAL) 1.This appeal by the revenue is directed against the order dated 28.12.2012passed by the Income Tax Appellate Tribunal, New Delhi in ITA No. 1493/2012pertaining to the assessment year 2006-07. 2.The Assessing Officer had made the additions of ` 37,75,465/- and` 30,41,000/- under Section 68 of the Income Tax Act, 1961 on account ofalleged unexplained investment and alleged unexplained cash credits which wereshown as share application money received by the assessee, respectively. 3.The assessee went up in appeal before the Commissioner of Income-tax(Appeals) who had substantially allowed the appeal of the assessee. In so far as the addition of` 37,75,465/- is concerned, the CIT (Appeals) deleted theaddition to the extent of ` 35,85,465/- which was essentially the unsecured loanreceived from Mr Alok Aggarwal. In so far as the loans and advances receivedfrom Smt Sadhna Aggarwal to the extent of ` 1,90,000/- (` 1,50,000 plus` 40,000/-) was concerned, the Commissioner of Income-tax concurred with theAssessing Officer that the same had not been explained. Therefore, to that extent(i.e., to the extent of ` 1,90,000/-) the Commissioner of Income-tax (Appeals)confirmed the addition. However, with regard to the amount advanced by MrAlok Aggarwal, to the extent of ` 35,85,465/-, the Commissioner of Income-tax(Appeals) deleted the same. 4.The Commissioner of Income-tax (Appeals) also deleted the addition of` 30,41,000/- on account of share application money by holding that the assesseehad discharged its burden to establish the identify and creditworthiness of theshare applicants as also the genuineness of the transactions. The Income TaxAppellate Tribunal concurred with the views of the Commissioner of Income-tax(Appeals). 5.In so far as the addition on account of unexplained investment wasconcerned, the Commissioner of Income-tax (Appeals) had directed theAssessing Officer to submit a remand report.The directions given by theCommissioner of Income-tax (Appeals) in that context were as under:- “4.2During the course of appellate proceedings, the matter wasremanded to the file of the AO as follows:- During the course of appellate proceedings, it is noticed that you havemade additions on account of unsecured loans for failure on the part ofthe directors Sh Alok Agarwal and Smt Sadhna Agarwal to attend theproceedings and explain the genuineness of the transactions. The ARhas given a list of forty seven persons in case of Sh Alok Agarwal,one of the directors, in whose bank account there were cash depositsand from where the loan was advanced to your assessee and confirmed that the directors are ready to depose before you so that thegenuineness and credibility of the transaction can be verified. In viewof the same, you are directed to call Sh Alok Agarwal and Smt SadhnaAgarwal with a view to verify the genuineness of receipt of loan of` 37,75,465/- by your assessee. You may also call for the I.T. Returnsof these persons along with their bank statements and agreements tosell the land so that the loan transaction can be verified to the hilt.” confirmed that the directors are ready to depose before you so that thegenuineness and credibility of the transaction can be verified. In viewof the same, you are directed to call Sh Alok Agarwal and Smt SadhnaAgarwal with a view to verify the genuineness of receipt of loan of` 37,75,465/- by your assessee. You may also call for the I.T. Returnsof these persons along with their bank statements and agreements tosell the land so that the loan transaction can be verified to the hilt.” 6.The Commissioner of Income-tax (Appeals), noted that the AssessingOfficer, by virtue of his report dated 18.09.2010, had indicated that initially thesaid Mr Alok Aggarwal and Smt Sadhna Aggarwal who were Directors of theAssessee Company did not respond to the notices issued by him.However,subsequently the Directors appeared and filed details including copies of theirincome-tax returns for the assessment years 2005-06 and 2006-07. In so far asMr Alok Aggarwal was concerned, in his income-tax return for the assessmentyear 2005-06 he had disclosed capital gains to the extent of ` 65,480/- and inrespect of the assessment year 2006-07, the said Mr Alok Aggarwal haddisclosed a capital loss to the extent of ` 5,87,940/- but, at the same time hedisclosed sale proceeds of land to the extent of ` 48,16,742/-. 7.From the above, the Commissioner of Income-tax (Appeals) concludedthat Mr Alok Aggarwal had ample availability of funds from which he couldhave advanced the loan of ` 35 lacs (approximately) to the assessee during theyear in question after depositing the same in his bank account.It is in thisbackdrop that the addition made by the Assessing Officer under Section 68 wasdeleted to the extent of the advances given by the said Mr Alok Aggarwal.However, with regard to the amounts received from Smt Sadhna Aggarwal, since,she had not disclosed any capital gains or availability of funds during the years inquestion, the Commissioner of Income-tax (Appeals) concluded that the saidamount of ` 1.9 lacs remained unexplained and, therefore, the addition made bythe Assessing Officer, to that extent, was upheld. It may also be pointed out at this juncture that inasmuch as the amount received from Mr Alok Aggarwal werein cash and were otherwise, than by way of account payee cheques/drafts, theAssessing Officer was directed to initiate penalty proceedings under section271D and 271E of the said Act for the alleged violation of sections 269SS and269TT. 8.The Income Tax Appellate Tribunal examined the order passed by theCommissioner of Income-tax (Appeals) and concurred with the views taken byhim. We also find no reason to take a different view. In any event, no substantialquestion of law arises for our consideration in so far as the addition, on accountof unexplained investment is concerned. 9.With regard to the addition made on account of share application moneyallegedly received by the assessee from two companies, the learned counsel forthe appellant/revenue submitted that merely furnishing the income-tax returnsand bank statements etc. of the share applicants would not be sufficient. It wasfurther necessary for the assessee to have discharged the burden of proving thecreditworthiness of the share applicants by producing the share applicants and byother evidence to the satisfaction of the Assessing Officer. Reliance was placedon the decision of this court in the case of CIT Vs. Nipun Builders andDevelopers Pvt. Ltd.: ITA No.120/2012 decided on 07.01.2013. The learnedcounsel for the appellant had placed reliance on paragraphs 8 and 9 of the saiddecision. The said paragraphs are reproduced hereinbelow:- “8. So far as the creditworthiness of the share subscribers isconcerned, the contention of the assessee before us is that it wasproved by the bank statements of those subscribers submitted beforethe AO. The AO has not referred to them in the assessment order butit is not in dispute that the copies of the bank statements werefurnished before him. Even assuming that the bank statements werefiled before the AO, that by itself may not be sufficient to prove thecreditworthiness without any explanation for the deposits in the accounts and their source. The usual argument in all such cases,including the present case, is that it is not for the assessee to prove thesource of source and origin of origin of the receipts. We are alive tothe difficulty that may be faced by an assessee to unimpeachablyestablish the creditworthiness of the share subscribers but at the sametime we are of the opinion that mere furnishing of the copies of thebank accounts of the subscribers is not sufficient to prove theircreditworthiness. There must be, in our opinion, some positiveevidence to show the nature and source of the resources of the sharesubscriber himself and therefore it is necessary for him to come beforethe AO and confirm his sources from which he subscribed to thecapital. In the present case the assessee did not produce the principalofficer of the companies who subscribed to the shares; it merely filedaletteratthe“dak”counteroftheAO,statingthatthecommunications sent by it to the share subscribers have not comeback unserved. This is not compliance with the direction of the AOwho had issued notice to the assessee to produce the principal officersof the subscribing companies. As is well known, in the case of privatelimited companies, it cannot be denied that there is a continuingcontact and relationship with the share holders and if the assessee wasserious enough to establish its case, it ought to have produced theprincipal officers of the subscribing companies before the AO so thatthey can explain the sources from which the share subscription wasmade. That would also have taken care of the difficulty of the assesseein proving the creditworthiness of the subscriber companies. It was,therefore, in the assessee’s own interest to have actively participatedand cooperated in the assessment proceedings and complied with thedirection of the AO to produce the principal officers of the subscribingcompanies. Instead, the assessee took an adamant, if we may use thatexpression, attitude and failed to comply with the direction of the AO;not only that, it challenged the AO’s finding that the summons sent tothe companies came back unserved with the remark “no suchcompany”, which was also supported by the report of the inspectorwho made a visit to the addresses. The assessee thus took a veryextreme stand which was in our opinion not justified; certainly it didnothingworthwhiletodischargetheonustoprovethecreditworthiness of the subscribing companies. 9. We referred to the argument of the assessee that it is not part of itsonus to prove the source of source and origin and origin of the sharesubscriptions. In addition to what we had said with reference to that argument in the preceding paragraph we cannot also help observingthat the basis of the argument is perhaps the judgment of the MadrasHigh Court in S. Hastimal vs. Commissioner of Income Tax, Madras,(1963) 49 ITR 273. That was a case of reassessment commenced inthe year 1957 calling upon the assessee to explain a credit in hisfavour in the books of account of the firm, made in the year 1947. Theassessee explained that he had borrowed the amount from one V inorder to provide the monies to the firm. The explanation was notaccepted right up to the Tribunal. Commenting on the order of theTribunal, a Division Bench of the Madras High Court observed asunder:- argument in the preceding paragraph we cannot also help observingthat the basis of the argument is perhaps the judgment of the MadrasHigh Court in S. Hastimal vs. Commissioner of Income Tax, Madras,(1963) 49 ITR 273. That was a case of reassessment commenced inthe year 1957 calling upon the assessee to explain a credit in hisfavour in the books of account of the firm, made in the year 1947. Theassessee explained that he had borrowed the amount from one V inorder to provide the monies to the firm. The explanation was notaccepted right up to the Tribunal. Commenting on the order of theTribunal, a Division Bench of the Madras High Court observed asunder:- “The Tribunal however has not chosen to accept theassessee’s case on grounds which we are unable toappreciate. The Tribunal commenting upon the fact that thebooks of account of the assessee were kept only at Phalodi,that pakka and katcha roker of the assessee at Phalodi hadnot been produced, and that the necessary link between theborrowing of Vijayaram and the money brought to Coonoorhad not been established. As stated already, with regard tothe sum of ` 15,000, the assessee produced indisputabledocumentary evidence to show that the amount came out ofhis borrowing at Jodhpur whether it was from VijayaramGaneshdas or from Gowri Shankar Bagdy. The assessee hasbeen able to point out a source for this sum of ` 15,000 andthis cannot be refuted by a mere steady disability on the partof the department or the Tribunal. After the lapse of tenyears the assessee should not be placed upon the rack andcalled upon to explain not merely the origin and source ofhis capital contribution but the origin of origin and thesource of source as well.” The quoted observations will clearly explain the context and setting inwhich they were made. They cannot, therefore, be understood asplacing an embargo on the power of the AO to ask the assessee toprove the creditworthiness of the creditor/share holder for the purposeof Section 68. In an appropriate case, if the facts and circumstancesjustify, it would be open to the AO to seek information from theassessee as to the creditworthiness of the creditor/share subscriberwhich may include information as to the sources of the creditor/sharesubscriber. If proving the creditworthiness of the creditor/subscriber isnow judicially accepted as one of the ingredients of the onus cast onthe assessee under Section 68, we do not see how proof of the resources of the creditor/share subscriber can be completely excludedfrom the sweep of the burden. It may not be required of the assessee togive in-depth particulars and details about the resources of the creditoror the share subscriber, but the minimum required of him would be, inour opinion, information that will prima face satisfy the AO about thecreditworthiness. Mere furnishing of the bank statements of the sharesubscribers without any explanation for the deposits in the accountsmay not meet the requirements of Section 68. It may be necessary toknow the business activities of the share-subscribers in order toascertain whether they are financially sound and are able to purchaseshares for substantial amounts; if they have borrowed monies formaking the investment, whether they were capable of repaying themhaving regard to the nature of their business, volume of the business,etc. These are very relevant, in our opinion, to establish thecreditworthiness of the investors. It is for this purpose that it isnecessary for the assessee, in appropriate cases where the facts andsurrounding circumstances justify, to seek the assistance of theprincipal officer of the subscribing companies and present him beforethe AO so that he will be in a position to explain in detail the sourcefrom which the shares were subscribed. A curious aspect of the matterwhich cannot be lost sight of is that the record reveals the assessee’sability to procure the share applicant’s bank statement. This speaksvolume about its conduct, and belies the argument about its inabilityto ensure the presence of such company’s principal officers.” 10.From a reading of the above extract, it is apparent that the case of NipunBuilders and Developers Pvt. Ltd. (supra) was different and is distinguishablefrom the present case. In that case, the summons sent by the Assessing Officer tothe Companies who had applied for shares had been returned with the remarks“no such company”.Whereas in the present case, the identity of the twocompanies which are sister companies stood established. Furthermore, this is nota case of mere furnishing of copies of bank accounts of the subscribers. But, inthe present case, as noted by the Commissioner of Income-tax (Appeals) theassessee had filed the income-tax returns of the subscriber companies as alsotheir bank statements and balance sheets in addition to the confirmation letters from the said two companies. A copy of the Form No. 2 filed by the assesseewith the Registrar of Companies regarding the allotment of shares to the said twocompanies had also been furnished. It is in this backdrop that the Commissionerof Income-tax (Appeals) had concluded that the assessee had been able to proveits case and that the Assessing Officer could not shift the burden back onto theAssessee Company without the Assessing Officer producing any tangiblematerial to doubt the veracity of the documents furnished by the assessee. TheIncome Tax Appellate Tribunal concurred with the views taken by theCommissioner of Income-tax (Appeals). 11.It is obvious that in the context and factual matrix of the present case, thecase of Nipun Builders and Developers Pvt. Ltd. (supra) is distinguishable. Theassessee in the present case, as rightly observed by the authorities below andparticularly by the Commissioner of Income-tax (Appeals) has been able todischarge the initial burden to establish the identity, creditworthiness andgenuineness as regards the transactions concerning the allotment of shares. Inthat view of the matter no substantial question of law arises for the considerationof this court. The appeal is dismissed. There shall be no order as to costs. BADAR DURREZ AHMED, J VIBHU BAKHRU, J APRIL 30, 2013‘RK’