Commissioner Of Income Tax-Ii v. Maf Academy P. Ltd

*IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment reserved on : 13[th ]August, 2013 Judgment pronounced on: 28[th] November, 2013 Judgment pronounced on: 28[th] November, 2013 + ITA341/2012 COMMISSIONER OF INCOME TAX-II ..... Appellant Through Mr. N.P. Sahni with Mr. Ruchesh Sinha, Advocates. Through Mr. N.P. Sahni with Mr. Ruchesh Sinha, Advocates. Versus MAF ACADEMY P. LTD. ..... Respondent Through Dr. Rakesh Gupta with Ms. Rani Kiyala and Mr. Rishabh Kapoor, Advocates. Through Dr. Rakesh Gupta with Ms. Rani Kiyala and Mr. Rishabh Kapoor, Advocates. CORAM: HON’BLE MR. JUSTICE SANJIV KHANNA HON’BLE MR. JUSTICE SANJEEV SACHDEVA SANJEEV SACHDEVA, J. 1. This is an appeal under Section 260A(1) of the Income Tax Act, 1961 (for short “the Act”) filed by the Revenue against the order of the Income Tax Appellate Tribunal dated 14.10.2011 in ITA No.3650/DEL/2011 for the Assessment Year 2002-03. Tax Act, 1961 (for short “the Act”) filed by the Revenue against the order of the Income Tax Appellate Tribunal dated 14.10.2011 in ITA No.3650/DEL/2011 for the Assessment Year 2002-03. 2. Vide order dated 07.11.2012, the following substantial question of law was framed:- “Whether on the facts and circumstances of case, the Income Tax Appellate Tribunal was correct in law in deleting the addition of Rs. 3,43,00,000/- u/s 68 of the Income Tax Act, 1961 holding the same to be camouflage transactions / accommodation entries? transactions / accommodation entries? 3. The Assessee had filed the return for the Assessment Year 2002-03 declaring nil income. The return was processed under Section 143(1) of the Income Tax Act. Year 2002-03 declaring nil income. The return was processed under Section 143(1) of the Income Tax Act. 4. On the basis of the information received from the Investigation Wing of the Income Tax Department, notice under Section 148 was issued to the Assessee. The proceedings were sought to be opened on the basis of the information unearthed by the Investigation Wing of the Income Tax Department, wherein it came to their knowledge that a huge money laundering Investigation Wing of the Income Tax Department, notice under Section 148 was issued to the Assessee. The proceedings were sought to be opened on the basis of the information unearthed by the Investigation Wing of the Income Tax Department, wherein it came to their knowledge that a huge money laundering ======================================================================= racket was being run by a few persons and bogus accommodation entries were being provided. As per the information of the Investigation Wing, accommodation entries were being provided in lieu of payment in cash of equivalent amount plus commission being paid thereon to the entry operators. The Investigation Wing during the investigation came across names of various individuals, who were operating as entry providers and also various parties, who were taking such accommodation entries. The name of the Assessee also figured as one of the parties involved in taking such accommodation entries. 5. In response to the notice under Section 148, the Assessee issued a letter dated 06.04.2009 submitting that the return filed on 30.09.2002 may be treated as the return filed in response to the notice under Section 148. The Assessee filed the said letter also inquiring about the reasons for reopening of the case. The reasons for reopening of the case were duly provided ======================================================================= ITA 341/2012 to the Assessee vide letter dated 12.10.2009 and the same are as under:- 5. In response to the notice under Section 148, the Assessee issued a letter dated 06.04.2009 submitting that the return filed on 30.09.2002 may be treated as the return filed in response to the notice under Section 148. The Assessee filed the said letter also inquiring about the reasons for reopening of the case. The reasons for reopening of the case were duly provided ======================================================================= ITA 341/2012 to the Assessee vide letter dated 12.10.2009 and the same are as under:- “The Investigation wing of the Income Tax Department had unearthed a huge money laundering mechanism wherein it was established that bogus accommodation entries were being provided. These accommodation entries are received in lieu of payment of cash of equivalent amount plus commission thereon to the entry operator. For obvious reasons, these cash transactions are not routed through the books of account of the Assessee. In this case, information has been received from Directorate of Income Tax, (Investigation), New Delhi that during the relevant assessment year, this Assessee had received the following cheque amount(s) in the nature of accommodation entry: Table: VALUE OF INSTRUMENT ENTRY No. BY TAKEN WHICH ENTRY TAKEN DATE OF NAME OF ENTRY ACCOUNT TAKEN HOLDER OF ENTRY GIVING ACCOUNT BANK FROM WHICH ENTRY GIVEN BRANCH A/C No. OF ENTRY OF ENTRY GIVING GIVING BANK ACCOUNT ======================================================================= ITA 341/2012 ======================================================================= 500300 12-Apr-01 CHINTPURNI SBP DG 50058 CREDITS 500300 23-Apr-01 SANTOSH KUMAR SBP DG 6182 CHAUDHARY 500300 23-Apr-01 SANTOSH KUMAR SBP DG 6182 CHAUDHARY 500300 01-May-01 KESO RAM GUPTA SBP DG 6257 500300 01-May-01 KESO RAM GUPTA SBP DG 6257 500300 21-May-01 VISHNU KUMAR SBP DG 6058 500300 21-May-01 VISHNU KUMAR SBP DG 6058 501000 22-May-01 BASANT SBP DG 4507 AGENCIES 501000 22-May-01 BASANT SBP DG 4507 AGENCIES 500000 12-JUN-01 HARBHAGWAN SBP DG 6701 BATRA 500000 12-JUN-01 HARBHAGWAN SBP DG 6701 BATRA 501000 13-JUN-01 SATISH KUMAR SBP DG 6774 SHARMA 501000 13-JUN-01 SATISH KUMAR SBP DG 6774 SHARMA 501000 15-JUN-01 SATISH KUMAR SBP DG 6774 SHARMA 501000 15-JUN-01 SATISH KUMAR SBP DG 6774 SHARMA ======================================================================= 900000 17-Sep-01 MANISH KUMAR SBP DG 6810 AGARWAL 900000 17-Sep-01 MANISH KUMAR SBP DG 6810 AGARWAL 900000 17-Sep-01 SATISH KUMAR SBP DG 6774 SHARMA 900000 17-Sep-01 SATISH KUMAR SBP DG 6774 SHARMA 600000 26-Sep-01 VINOD GARG SBP DG 6776 600000 26-Sep-01 VINOD GARG SBP DG 6776 1500000 26-Sep-01 CHINTPURNI SBP DG 50058 CREDITS 1500000 26-Sep-01 CHINTPURNI SBP DG 50058 CREDITS 600000 03-Oct-01 KESO RAM GUPTA SBP DG 6907 600000 03-Oct-01 KESO RAM GUPTA SBP DG 6907 600000 09-Oct-01 CHETAN PRAKASH SBP DG 6888 AGGARWAL 600000 09-Oct-01 CHETAN PRAKASH SBP DG 6888 AGGARWAL 600000 09-Oct-01 VISHNU KUMAR SBP DG 6807 JAIN 600000 09-Oct-01 VISHNU KUMAR SBP DG 6807 JAIN 600000 16-Oct-01 RAJEEV KUMAR SBP DG 6910 AGGARWAL ======================================================================= Therefore, I have reason to believe that an income of Rs.2,92,12,400/- plus commission @ 2% thereon amounting to Rs.5,84,248/-, totalling to Rs.2,97,96,648/- has escaped assessment during the assessment year. On the basis of this information, I have reason to believe that the incomes described above have escaped assessment and that the case is fit for issuing Notice U/s of the I.T.Act,1961”. income of Rs.2,92,12,400/- plus commission @ 2% thereon amounting to Rs.5,84,248/-, totalling to Rs.2,97,96,648/- has escaped assessment during the assessment year. On the basis of this information, I have reason to believe that the incomes described above have escaped assessment and that the case is fit for issuing Notice U/s of the I.T.Act,1961”. Therefore, I have reason to believe that an income of Rs.2,92,12,400/- plus commission @ 2% thereon amounting to Rs.5,84,248/-, totalling to Rs.2,97,96,648/- has escaped assessment during the assessment year. On the basis of this information, I have reason to believe that the incomes described above have escaped assessment and that the case is fit for issuing Notice U/s of the I.T.Act,1961”. income of Rs.2,92,12,400/- plus commission @ 2% thereon amounting to Rs.5,84,248/-, totalling to Rs.2,97,96,648/- has escaped assessment during the assessment year. On the basis of this information, I have reason to believe that the incomes described above have escaped assessment and that the case is fit for issuing Notice U/s of the I.T.Act,1961”. 6. The Assessee, vide letter dated 21.10.2009, filed the objections to the initiation of proceedings under Section 147 of the Income Tax Act. The objections were disposed of against the Assessee on 21.10.2009. One of the grounds taken by the Assessee was that certain entries mentioned in the reasons recorded objections to the initiation of proceedings under Section 147 of the Income Tax Act. The objections were disposed of against the Assessee on 21.10.2009. One of the grounds taken by the Assessee was that certain entries mentioned in the reasons recorded ======================================================================= ITA 341/2012 were duplicate entries and were figuring in two or three places and on account of this, the amount mentioned in the reasons was inflated. The Assessee before the Assessing Officer submitted a list of parties out of the parties mentioned in the reasons for reopening and claimed that these parties had invested money towards acquisition of share capital in the Assessee amounting to Rs.1,50,00,000/-. The list of the parties is as under:- 7. The Assessing Officer during the reassessment proceedings found, on the basis of the inquires and investigations made by the Investigation Wing, that the 24 parties/persons, who legitimately had invested a sum of Rs.1,50,00,000/- as share capital in the Assessee were in fact parties belonging to one Mahesh Garg group and these parties/persons were not carrying on any actual business and were engaged in the business of providing accommodation entries. The Investigation Wing had recorded the statement of Mahesh Garg on various dates and in the statement of Mahesh Garg, various dates and modus operandi unearthed. 8. As per the Investigation wing the modus operandi adopted by this entry operator was that the entry operator (person who provides such entries) would operate a number of accounts either in the same bank or branch or in different branches in the name of banks/firms/proprietor concerns and individuals. For the purpose of operations of these bank accounts and to legitimize the transactions, income tax returns ======================================================================= ITA 341/2012 would be filed and PAN numbers would be obtained in the names of these persons. Various individuals would be hired, who would be merely name lenders in whose names bank accounts would be operated and returns would be filed. However, two or three key persons would be employed who would be involved in the operations of bank accounts, collection of cash and deposit of the same. The name lenders would be required to sign documents and cheque books from time to time. 9. As per the Investigation wing whenever any beneficiary (person who obtains an entry) was interested in taking an entry, he would approach the entry operator and in exchange for cash and commission, obtain a cheque/Demand Draft/Pay Order for the value of the cash. The cash would be deposited by the entry operator in an account either his own account or the account of the name lender or in the name of a relative/friend. On deposit of the said ======================================================================= 9. As per the Investigation wing whenever any beneficiary (person who obtains an entry) was interested in taking an entry, he would approach the entry operator and in exchange for cash and commission, obtain a cheque/Demand Draft/Pay Order for the value of the cash. The cash would be deposited by the entry operator in an account either his own account or the account of the name lender or in the name of a relative/friend. On deposit of the said ======================================================================= cash, a cheque of the account of the said name lenders or demand draft or pay order obtained from the bank of the name lenders would be then handed over to the beneficiary. At times, the entry operator or name lender would transfer the funds from one account to the other and through this process give semblance of legitimacy to the transaction. The beneficiary’s cash would be made to transfer through various bank accounts before being routed back to the beneficiary. The real purpose of transferring the fund from one account to the other was to mislead the authorities and to create a semblance of legitimate transaction. The entry operators were cautious enough to obtain a PAN number in their names and also in the names of the name lenders and regular returns would be filed with the Department so as to create semblance of genuineness and also to show creditworthiness of these parties. 10. As per the investigation wing another modus operandi, ======================================================================= ITA 341/2012 which was an extension of the first modus operandi mentioned above, was that the entry provider would invest money in a company which was a private limited unlisted company. The money would be infused into such company as money towards acquisition of share capital or would be share application money. The acquisition of the share capital or investment in the share application money would at times be at a huge premium. Ultimately, the said share capital was then sold back by the Directors or family members/friends of the Directors at a huge discount. The share capital was purchased at high prices (Premium) and in a short span sold back to the company or its Directors at a nominal value thereby creating semblance of legitimacy to the transactions. 11. The Assessee Company is a private limited company. In the case of the Assessee, in order to verify the genuineness of the transactions as well as the creditworthiness of the parties, who had invested in ======================================================================= ITA 341/2012 the Assessee Company, the Assessing Officer asked the Assessee to file the necessary details in respect of the parties who had infused share capital in the Assessee Company. The Assessee filed affidavits of confirmation of the following parties: 12. The Assessing Officer on receipt of the affidavits from the Assessee issued summons under Section 131 to the 9 parties, who had executed the affidavits in the year 2009. The summons were received back unserved. The Assessing Officer during the reassessment proceedings further noticed that the addition to the share capital of the Assessee was not only Rs.1,50,00,000/-, as mentioned by the Assessee, but was Rs.2,85,00,000/- by as many as 40 more persons, as mentioned below:- the Assessee issued summons under Section 131 to the 9 parties, who had executed the affidavits in the year 2009. The summons were received back unserved. The Assessing Officer during the reassessment proceedings further noticed that the addition to the share capital of the Assessee was not only Rs.1,50,00,000/-, as mentioned by the Assessee, but was Rs.2,85,00,000/- by as many as 40 more persons, as mentioned below:- ======================================================================= ITA 341/2012 ======================================================================= ITA 341/2012 13. The Assessing Officer thus found that the Assessee had received share capital including premium of a sum of Rs. 4,35,00,000/- during the year and out of the said amount only Rs.92,00,000/- had been received from the four Directors/their family members of the Assessee company and the remaining amount had had received share capital including premium of a sum of Rs. 4,35,00,000/- during the year and out of the said amount only Rs.92,00,000/- had been received from the four Directors/their family members of the Assessee company and the remaining amount had been received from the parties mentioned in the reasons recorded for reopening or from related parties. Summons were selectively issued to 8 more additional parties, however, the same were returned unserved as the parties were not available at the addresses provided by the Assessee. On the failure of the availability of the parties at the given addresses and also their failure to appear pursuant to the summons, an Inspector was deputed to serve summons, who reported that none of the parties were available at the addresses given by the Assessee. The Assessee was thereafter directed to produce the parties. However, the authorized representative of the Assessee stated that it was not possible for them to produce the said parties, who had invested in the share capital of the Assessee Company. 14. The Assessing Officer, vide his assessment order dated 29.12.2009, assessed the income at Rs.3,49,86,000/-. Aggrieved by the assessment order, ======================================================================= ITA 341/2012 the Assessee filed an appeal against the said assessment order. The Commissioner of Income Tax (Appeals) noticed that the appellant company was incorporated on 17.07.2007 and upto 31.03.2001, it had only nominal share capital and had not carried out any business activity either in the year of incorporation or the subsequent year in which the present assessment relates to. On the grounds of challenge to the reopening of assessment proceedings under Section 147, the Commissioner of Income Tax (Appeals) held in favour of the Revenue and held that the proceedings had been rightly reopened for reassessment. 15. With regard to the additions made by the Assessing Officer of Rs.3,49,86,000/-, the Commissioner of Income Tax (Appeals) allowed the appeal filed by the Assessee. One of the reasons for allowing the appeal is that the Assessing Officer has relied on the statement of Mahesh Garg recorded by the ======================================================================= ITA 341/2012 Investigation Wing and neither the statement was recorded by the Assessing Officer nor was Mahesh Garg summoned to re-examine the fact as to whether Mahesh Garg knew the Assessee company and to verify the veracity and the statement made by Mahesh Garg before the Investigation Wing. 16. The Commissioner of Income Tax (Appeals) was of the view that merely because the Assessee could not furnish the present addresses of the subscribers to the share capital or could not produce them before the Assessing Officer for personal deposition, would not prove that the share capital had emanated from the coffers of the Assessee’s unexplained sources. the view that merely because the Assessee could not furnish the present addresses of the subscribers to the share capital or could not produce them before the Assessing Officer for personal deposition, would not prove that the share capital had emanated from the coffers of the Assessee’s unexplained sources. 16. The Commissioner of Income Tax (Appeals) was of the view that merely because the Assessee could not furnish the present addresses of the subscribers to the share capital or could not produce them before the Assessing Officer for personal deposition, would not prove that the share capital had emanated from the coffers of the Assessee’s unexplained sources. the view that merely because the Assessee could not furnish the present addresses of the subscribers to the share capital or could not produce them before the Assessing Officer for personal deposition, would not prove that the share capital had emanated from the coffers of the Assessee’s unexplained sources. 17. The Commissioner of Income Tax (Appeals) had further held that the Assessing Officer did not make any effort to find out from the Assessee whether the said parties had made investment in the share capital of the Assessee nor was an opportunity given to the further held that the Assessing Officer did not make any effort to find out from the Assessee whether the said parties had made investment in the share capital of the Assessee nor was an opportunity given to the ======================================================================= Assessee to cross-examine Mahesh Garg. The Commissioner of Income Tax (Appeals) further held that the Assessee had been paid money through account payee cheques. The fact that the cash was deposited in the accounts of the persons, who had purchased the shares immediately preceding the issuance of cheque, does not prove that the cash was not of the persons and was of the Assessee company. 18. The Commissioner of Income Tax (Appeals) was further of the view that the subscribers to the share capital were people who existed on the record of the Income Tax Authorities/Department and had bank accounts from which payments were made and thus, it could not be said that their identity was not proved since the Assessee company had submitted copies of their return of income. further of the view that the subscribers to the share capital were people who existed on the record of the Income Tax Authorities/Department and had bank accounts from which payments were made and thus, it could not be said that their identity was not proved since the Assessee company had submitted copies of their return of income. 19. The Commissioner of Income Tax (Appeals) was further of the view that merely because some further of the view that merely because some ======================================================================= information was received by the Assessing Officer, which was not verified and no opportunity was granted by the Assessing Officer to cross-examine or to verify the evidences furnished by the Assessee and that the burden on the Assessing Officer of establishing these evidences could not be shifted to the Assessee. 20. Another factor that the Commissioner of Income Tax (Appeals) has relied on is that the Assessing Officer had not held that no dividend or interest would be credited to the parties subscribing to the share capital and with regard to the non-availability of the parties at the given addresses, the Assessing Officer was required to find out from the Assessee and bankers of these parties about their current addresses and since cash had been deposited in the accounts of these parties, the additions should have been made in the hands of the subscribers and not the Assessee company. ======================================================================= 20. Another factor that the Commissioner of Income Tax (Appeals) has relied on is that the Assessing Officer had not held that no dividend or interest would be credited to the parties subscribing to the share capital and with regard to the non-availability of the parties at the given addresses, the Assessing Officer was required to find out from the Assessee and bankers of these parties about their current addresses and since cash had been deposited in the accounts of these parties, the additions should have been made in the hands of the subscribers and not the Assessee company. ======================================================================= 21. The Commissioner of Income Tax (Appeals) has further held that the appellant has furnished voluminous evidences to justify the identity and creditworthiness of the parties and genuineness of the transactions and that no verification was carried out by the Assessing Officer to controvert the evidences filed by the Assessee from the Income Tax record of the concerned parties. Accordingly, the Commissioner of Income Tax (Appeals) has held that the officer was not justified in making an addition of Rs.3,43,00,000/- under Section 68 of the Act and the same was thus deleted. further held that the appellant has furnished voluminous evidences to justify the identity and creditworthiness of the parties and genuineness of the transactions and that no verification was carried out by the Assessing Officer to controvert the evidences filed by the Assessee from the Income Tax record of the concerned parties. Accordingly, the Commissioner of Income Tax (Appeals) has held that the officer was not justified in making an addition of Rs.3,43,00,000/- under Section 68 of the Act and the same was thus deleted. 22. The matter was carried forward by the Revenue by way of an appeal to the Income Tax Appellate Tribunal. Vide the impugned order, the ITAT upheld the order passed by the Commissioner of Income Tax way of an appeal to the Income Tax Appellate Tribunal. Vide the impugned order, the ITAT upheld the order passed by the Commissioner of Income Tax (Appeals). 23. We have heard the learned counsel for the parties and also perused the records produced by the Revenue. We are of the considered opinion that the orders of the CIT (Appeals) and the ITAT in deleting the addition made by the AO of Rs. 3,43,00,000/- under section 68 of the Act are clearly unsustainable. 24. Recently in the case of COMMISSIONER OF INCOME TAX VS NRPORTFOLIO PVT.LTD (INCOME TAX APPEAL NO.1018 OF 2011 AND 1019 OF 2011) vide Judgment dated 22.11.13 we have held as under: 14. When an assessee does not produce evidence or tries to avoid appearance before the Assessing Officer, it necessarily creates difficulties and prevents ascertainment of true and correct facts as the Assessing officer is denied advantage of the contention or factual assertion by the assessee before him. In case an assessee deliberately and intentionally fails to produce evidence before the Assessing Officer with the desire to prevent inquiry or investigation, an adverse view should be taken. We shall now come to the merits and the ======================================================================= findings recorded by the Commissioner (Appeals), which as noted above, have been simply affirmed by the tribunal without verifying or referring to the facts. …….. 14. When an assessee does not produce evidence or tries to avoid appearance before the Assessing Officer, it necessarily creates difficulties and prevents ascertainment of true and correct facts as the Assessing officer is denied advantage of the contention or factual assertion by the assessee before him. In case an assessee deliberately and intentionally fails to produce evidence before the Assessing Officer with the desire to prevent inquiry or investigation, an adverse view should be taken. We shall now come to the merits and the ======================================================================= findings recorded by the Commissioner (Appeals), which as noted above, have been simply affirmed by the tribunal without verifying or referring to the facts. …….. 17. The Commissioner (Appeals) thereafter proceeded on the basis that even if the subscribers to the share capital were not genuine, the amount received cannot be regarded as undisclosed income of the respondent-assessee. Reference was made to the decision of the Delhi High Court in Lovely Exports Private Limited and Divine Leasing and Finance Limited(supra). Reference was made to some decision of the tribunal. It would be here relevant to highlight and note what was recorded by the Assessing Officer in the assessment order. The Assessing Officer has mentioned that the subscribers belonged to Mahesh Garg group of entry operators, which included 51 companies/ persons, who were operating more than 100 bank accounts in different banks/branches. Their modus ======================================================================= ITA 341/2012 operandiwas to provide accommodation entries to different persons/beneficiaries. Reference was made to the bank statements of the entry operators that showed substantial deposit of cash in the bank accounts and subsequent issue of cheques to the beneficiaries. This was the only activity of these companies/persons. The said companies/persons were not carrying on any other business activity i.e., manufacturing or trading activity. The assessment order has quoted and referred to the bank account statements in support of the said assertion and finding. The Assessing Officer has mentioned that the respondent-assessee was a private limited company, closely held and there should be proximate relationship between the promoter directors and the shareholders. Closely held companies usually receive share capital subscriptions from friends, relatives and not from unrelated/ unknown third parties/ general public. There was no relationship or connection between the subscribers and the respondent-assessee, for subscribers to ======================================================================= ITA 341/2012 become investors. Assessment order records that to establish identity and availability of funds, it was necessary to have at least some idea if not complete details of the actual business undertaken and engaged in by the respondent-assessee and explained how and why these unrelated and unconnected third parties decided to become investors in the absence of public issue or advertisement. 18. In the remand report, the Assessing Officer referred to the provisions of Section 68 of the Act and their applicability. The word “identity” as defined, it was observed meant the condition or fact of a person or thing being that specified unique person or thing. The identification of the person would include the place of work, the staff, the fact that it was actually carrying on business and recognition of the said company in the eyes of public. Merely producing PAN number or assessment particulars did not establish the identity of the person. The actual and true identity of the person or a company was the business ======================================================================= ITA 341/2012 18. In the remand report, the Assessing Officer referred to the provisions of Section 68 of the Act and their applicability. The word “identity” as defined, it was observed meant the condition or fact of a person or thing being that specified unique person or thing. The identification of the person would include the place of work, the staff, the fact that it was actually carrying on business and recognition of the said company in the eyes of public. Merely producing PAN number or assessment particulars did not establish the identity of the person. The actual and true identity of the person or a company was the business ======================================================================= ITA 341/2012 undertaken by them. This according to us is the correct and true legal position as identity, creditworthiness and genuineness have to be established. PAN numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertaining active nature of business activity. PAN is a number which is allotted and helps the Revenue keep track of the transactions. PAN number is relevant but cannot be blindly and without considering surrounding circumstances treated as sufficient to discharge the onus, even when payment is through bank account. 19. On the question of creditworthiness and genuineness, it was highlighted that the money no doubt was received through banking channels, but did not reflect actual genuine business activity. The share subscribers did not have their own profit making apparatus and were not involved in business activity. They merely rotated money, which was coming through the bank accounts, which means deposits by way of cash and issue of cheques. ======================================================================= ITA 341/2012 The bank accounts, therefore, did not reflect their creditworthiness or even genuineness of the transaction. The beneficiaries, including the respondent-assessee, did not give any share-dividend or interest to the said entry operators/subscribers. The profit motive was normal in case of investment entirely was absent. In the present case, no profit or dividend was declared on the shares. Any person, who would invest money or give loan would certainly seek return or income as consideration. These facts are not adverted to and as noticed below are true and correct. They are undoubtedly relevant and material facts for ascertaining creditworthiness and genuineness of the transactions. …… 23. The contention that the Revenue must have evidence to show circulation of money from the assessee to the third party is fallacious and has been repeatedly rejected, even when Section 68 of the Act was not in the statute. In A. Govindarajulu Mudaliar v. CIT ======================================================================= [1958] 34 ITR 807, Supreme Court observed that it was not the duty of the Revenue to adduce evidence to show from what source, income was derived and why it should be treated as concealed income. The assessee must prove satisfactorily the source and nature of cash received during the accounting year. Similarly observations were made in CIT vs. M. Ganapathi Mudaliar [1964] 53 ITR 623 (SC), inter alia holding that it was not necessary for the Revenue to locate the exact source. This principle was reiterated in CIT vs. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194 (SC), wherein the contention that the Assessing Officer should indicate the source of income before it was taxable, was described as an incorrect legal position. Thus when there is an unexplained cash credit, it is open to the Assessing Officer to hold that it was income of the assessee and no further burden lies on him to show the source. In Yadu Hari Dalmia vs. CIT [1980] 126 ITR 48, a Division Bench of Delhi High Court has observed:- “It is well known that the whole catena ======================================================================= ITA 341/2012 “It is well known that the whole catena ======================================================================= ITA 341/2012 of sections starting from s. 68 have been introduced into the taxing enactments step by step in order to plug loopholes and in order to place certain situations beyond doubt even though there were judicial decisions covering some of the aspects. For example, even long prior to the introduction of s. 68 in the statute book, courts had held that where any amounts were found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was, in the opinion of the ITO, not satisfactory, the sums so credited could be charged to income-tax as income of the assessee of a relevant previous year. Section 68 was inserted in the I.T. Act, 1961, only to provide statutory recognition to a principle which had been clearly adumbrated in judicial decisions.” 24. We are conscious of the doctrine of ======================================================================= ITA 341/2012 ‘source of source’ or ‘origin of origin’ and also possible difficulty which an assessee may be faced with when asked to establish unimpeachable credit worthiness of the share subscribers. But this aspect has to be decided on factual matrix of each case and strict or stringent test may not be applied to arms length angel investors or normal public issues. Doctrine of ‘source of source’ or ‘origin of origin’ cannot be applied universally, without reference to the factual matrix and facts of each case. The said test in case of normal business transactions may be light and not vigorous. The said doctrine is applied when there is evidence to show that assessee may not be aware, could not have knowledge or was unconcerned as to the source of money paid or belonging to the third party. This may be due to the nature and character of the commercial/business transaction relationship between the parties, statutory postulates etc. However, when there is surrounding evidence and material manifesting and revealing involvement of the assessee in the ======================================================================= ITA 341/2012 “transaction” and that it was not entirely an arm’s length transaction, resort or reliance to the said doctrine may be counter-productive and contrary to equity and justice. The doctrine is not an eldritch or a camouflage to circulate illgotten and unrecorded money. Without being oblivious to the constraints of the assessee, an objective and fair approach/determination is required. Thus no assessee should be harassed and harried but any dishonest façade and smokescreens which masquerade as pretence should be exposed and not accepted. 25. In Lovely Exports (supra), a Division Bench examined two earlier decisions of this court in CIT vs. Steller Investment Ltd. [1991] 192 ITR 287 (Delhi) and CIT vs. Sophia finance Ltd.[1994] 205 ITR 98 (FB) (Delhi). The decision in Steller Investment’s case (supra) was affirmed by the Supreme court but by observing that the conclusion was on the facts and no interference was called for. Lovely Exports (supra) was a case of public limited company ======================================================================= where shares were subscribed by public and it was accordingly observed:- “This reasoning must apply a fortiori to large scale subscriptions to the shares of a public Company where the latter may have no material other than the application forms and bank transaction details to give some indication of the identity of these subscribers. It may not apply in circumstances where the shares are allotted directly by the Company/assessee or to creditors of the assessee. This is why this court has adopted a very strict approach to the burden being laid almost entirely on an assessee which receives a gift.” ======================================================================= where shares were subscribed by public and it was accordingly observed:- “This reasoning must apply a fortiori to large scale subscriptions to the shares of a public Company where the latter may have no material other than the application forms and bank transaction details to give some indication of the identity of these subscribers. It may not apply in circumstances where the shares are allotted directly by the Company/assessee or to creditors of the assessee. This is why this court has adopted a very strict approach to the burden being laid almost entirely on an assessee which receives a gift.” 26.Thereafter reference was made to Full Bench decision in the case of Sophia Finance Ltd.’s case (supra) wherein it has been observed that if the shareholders exists then, “possibly”, no further enquiry need to be made and that the Full Bench had not reflected upon the question of whether the burden of proof ======================================================================= ITA 341/2012 rested entirely on the assessee and at which point this burden justifiably shifted to the assessing officer. The Full Bench has observed that they were not deciding as to on whom and to what extent was the onus to show that the amount credited in the books of accounts was share capital and when the onus was discharged, was not decided. The standard of proof might be rigorous and stringent and was dependent upon nature of the transaction and where there was evidence that the source of investment cannot be manipulated, it was material. Similarly, it was observed that assessee could scarcely be heard to say that he did not know the particulars of a donor in case of a gift. It was held:- “There cannot be two opinions on the aspect that the pernicious practice of conversion of unaccounted money through the masquerade or channel of investment in the share capital of a company must be firmly excoriated by the Revenue. Equally, where the preponderance of evidence indicates ======================================================================= ITA 341/2012 absence of culpability and complexity of the assessee it should not be harassed by the Revenues’s insistence that it should prove the negative. In the case of a public issue, the Company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers. The Company must, however, maintain and make available to the Assessing Officer for his perusal, all the information contained in the statutory share application documents. In the case of private placement the legal regime would not be the same. A delicate balance must be maintained while walking the tightrope of Section68and69of the Income Tax Act. The burden of proof can seldom be discharged to the hilt by the assessee; if the AO harbours doubts of the legitimacy of any subscription he is empowered, nay duty-bound, to carry out thorough investigations. But if the Assessing Officer fails to unearth any ======================================================================= ITA 341/2012 wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the Company………………… xxxx ……….Once material to prove these ingredients are produced it is for the Assessing Officer to find out as to whether, on these materials, the assessed has succeeded in establishing the ingredients mentioned above. The Assessing Officer `lift the veil’ and enquire into the real nature of the transaction. C.I.T. v. Ruby Traders and Exporters Ltd. : [2003]263ITR300(Cal) , C.I.T. v. Nivedan Vanijya Niyojan Ltd. [2003]263ITR623(Cal) and C.I.T. v. Kundan Investment Ltd. [2003]263ITR626(Cal.) are the other three. In this analysis, a distillation of the precedents yields the following ======================================================================= ITA 341/2012 In this analysis, a distillation of the precedents yields the following ======================================================================= ITA 341/2012 propositions of law in the context of Section68of the IT Act. The assessee has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber. (4) If relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the Shareholders Register, Share Application Forms, Share Transfer Register etc., it would constitute acceptable proof or acceptable explanation by the assessed. (5) The Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices; (6) the onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the assessee ======================================================================= nor should the Assessing Officer take such repudiation at face value and construe it, without more, against the assessee; and (7) The Assessing Officer is duty-bound to investigate the creditworthiness of the creditor/ subscriber the genuineness of the transaction and the veracity of the repudiation.” 27. The decision in the case of Lovely Exports(supra) was considered in CIT vs. Nova Promoters and Finlease (P) Ltd. (supra) and it was elucidated:- “38. The ratio of a decision is to be understood and appreciated in the background of the facts of that case. So understood, it will be seen that where the complete particulars of the share applicants such as their names and addresses, income tax file numbers, their creditworthiness, share application forms and share holders’ register, share transfer register etc. are furnished to the ======================================================================= ITA 341/2012 Assessing Officer and the Assessing Officer has not conducted any enquiry into the same or has no material in his possession to show that those particulars are false and cannot be acted upon, then no addition can be made in the hands of the company under sec.68 and the remedy open to the revenue is to go after the share applicants in accordance with law. We are afraid that we cannot apply the ratio to a case, such as the present one, where the Assessing Officer is in possession of material that discredits and impeaches the particulars furnished by the assessee and also establishes the link between self-confessed “accommodation entry providers”, whose business it is to help assessees bring into their books of account their unaccounted monies through the medium of share subscription, and the assessee. The ratio is inapplicable to a case, again such as the present one, where the involvement ======================================================================= ITA 341/2012 of the assessee in such modus operandi is clearly indicated by valid material made available to the Assessing Officer as a result of investigations carried out by the revenue authorities into the activities of such “entry providers”. The existence with the Assessing Officer of material showing that the share subscriptions were collected as part of a pre-meditated plan – a smokescreen – conceived and executed with the connivance or involvement of the assessee excludes the applicability of the ratio. In our understanding, the ratio is attracted to a case where it is a simple question of whether the assessee has discharged the burden placed upon him under sec.68 to prove and establish the identity and creditworthiness of the share applicant and the genuineness of the transaction. In such a case, the Assessing Officer cannot sit back with folded hands till the assessee exhausts all the evidence or material in his ======================================================================= ITA 341/2012 ==========================