Income Tax Appellate Tribunal - Agra
Garg Preservation (P) Ltd., Agra vs Assessee on 14 June, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL,
AGRA BENCH, AGRA
BEFORE : SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
SHRI A.L. GEHLOT, ACCOUNTANT MEMBER
ITA No. 79/Agra/2012
Asstt. Year : 2004-05
M/s. Garg Preservation (P) Ltd., vs. A.C.I.T., 4(1), Agra.
D-522, Kamla Nagar, Agra.
(PAN: AACCG 0391 F)
(Appellant) (Respondent)
Appellant by : Shri Pankaj Gargh, Advocate
Respondent by : Shri Hoti Lal, Jr. D.R.
Date of hearing : 14.06.2013
Date of pronouncement of order : 21.06.2013
ORDER
Per Bhavnesh Saini, J.M.:
This appeal by the assessee is directed against the order of ld. CIT(A)-II, Agra dated 11.10.11 for the assessment year 2004-05.
2. This appeal was earlier dismissed in default vide order dated 11.10.12. The assessee moved M.A. No. 02/2013, explaining the reasons for non-appearance on the date of hearing. The M.A. of the assessee was allowed vide order dated 17.05.2013 and the appeal of the assessee was restored.
2 ITA No. 79/Agra/2012
3. We have heard the ld. representatives of both the parties, perused the findings of the authorities below and considered the material available on record.
4. The assessee on ground No. 1 to 3 challenged the addition of Rs.14,65,000/- u/s. 68 of the IT Act. The assessee is a company and derives income from cold storage. The assessee-company was incorporated w.e.f. 19.09.2002. The AO found that the entire activities, such as receipts of share application money, loans, construction of building etc. were done during the previous year relevant to the assessment year under consideration. The assessee filed return of income on 30.10.2004 declaring loss of Rs.12,80,284/-. According to the AO, the assessee had received share application money from 30 agriculturists, the details of the same are noted at page 2 of the assessment order amounting to Rs.14,65,000/-. Further as per AO, the assessee could not prove the identity and creditworthiness of these agriculturist and accordingly by invoking provisions of section 68, addition of Rs.14,65,000/- was made. The assessee challenged addition before the ld. CIT(A) and it was submitted that the assessee is a new company and received share application money. Therefore, could not be said to have any income from undisclosed source. The assessee company was incorporated on 19.09.2002 with the objects to carry on the business of cold storage. The construction of the cold storage started during the financial year 2003-04 and it was completed by the end of Feb. 2004 and started functioning thereafter only. Therefore, the company was 3 ITA No. 79/Agra/2012 not having any existing source of income during the relevant assessment year. The amount in question was received by the assessee from various persons as share application money and shares were also allotted to them by the assessee company. Same is also evident from Form No. 2 filed with the Registrar of Companies. Copies of share applications, proof of identity, proof of creditworthiness like documents of land holding to establish agricultural income and income certificates were filed. Further the affidavits of the share applicants were also submitted. The amounts were provided by the share holders out of their own sources and they also submitted their affidavits to the company to that effect. The assessee relied upon the decision of Delhi High Court in the case of Sofia Finance Ltd., 205 ITR 98 on the proposition that if share holders exist then possibly no further enquiry indeed be made. The assessee also relied upon the similar decision of Delhi High Court in the case of Steller Investments, 192 ITR 267, which has been confirmed by the Hon'ble Supreme Court in 115 Taxman 99. It was submitted that the documents filed on record clearly prove identity of the share applicants, their creditworthiness and also filed additional evidences before the ld. CIT(A) to support the above contentions also which have been admitted by the ld. CIT(A) for hearing. The ld. CIT(A), therefore, found that the assessee has filed copies of share applications, copies of Khasra and Khatoni etc. of land holdings of share holders and in certain cases, copies of ration cards and in some other cases certificates from Tehsildar with regard to proof of income. The gist of each and every share applicant in detail 4 ITA No. 79/Agra/2012 is mentioned at page 5 to 10 of the appellate order supported by evidence. However, the ld. CIT(A) did not accept the creditworthiness of the share holders and genuineness of the transactions and dismissed this ground of appeal of the assessee.
5. The ld. counsel for the assessee reiterated the submissions made before the authorities below and filed a chart of each and every share applicant to support that the amounts were either received through draft or through cash and the assessee disclosed complete name and address of share applicants before the authorities below which are supported by share application forms, declaration, identity proof, affidavit, Khasra, Khatoni of land holding and income certificates, Copies of which are filed in the paper book. In some cases, copies of identity card, driving license and other evidences have been filed to prove the identity of the share applicants. He has submitted that same information was also supplied to the Registrar of Companies (copies filed at page 158 of the paper book). He has submitted that same share holders also stored their potatoes in the cold storage of the assessee. He has submitted that the share application money was received prior to commencement of actual business and it is the first year of business of assessee. Construction of the cold storage was completed in Feb. 2004 and majority of the share application money was received prior to commencement of business. Therefore, the same could not be treated as undisclosed money of the assessee. He 5 ITA No. 79/Agra/2012 has, therefore, submitted that the assessee had discharged the onus to prove identity of the share applicants and their creditworthiness and genuineness of the transactions. Once the assessee proved the existence of the share holders, no addition could be made in the case of assessee. In support of his submissions, he has relied upon the following decisions :
(i). Order of ITAT, Agra Bench in the case of DCIT vs. M/s. Surajmal Cold Storage(P) Ltd. (ITA No. 345/Agra/2009) dated 09.08.12.
(ii). Decision of Hon'ble Supreme Court in the case of CIT vs. Lovely Export (P) Ltd., 216 CTR (SC) 195.
(iii). Decision of Hon'ble Allahabad High Court in the case of Jaya Securities Ltd. vs. CIT, 166 Taxman 7.
(iv). Decision of Hon'ble Supreme Court in the case of CIT vs. Bharat Engineering & Construction Co., 83 ITR 187.
(v). Decision of Hon'ble Allahabad High Court in the case of CIT vs. Jaiswal Grains Store, 271 ITR 136.
On the other hand, the ld. DR relied upon the orders of the authorities below.
6. We have considered the rival submissions and the material available on record. The assessee filed complete details of share applicants before the authorities below with their complete address. It is not in dispute that the assessee filed share application forms, declaration and affidavits of all the share applicants before the authorities below supported by various documents, proof of identity of 6 ITA No. 79/Agra/2012 share holders. The assessee also filed copy of Khasra and Khatoni of land holding by the share holders along with copies of ration card, driving license, identity card and in some cases even the certificate of income issued by Tehsildar have been filed. These documents on record clearly prove that all the share applicants were agriculturists and were holding agricultural land and earned income there from. The list of share applicants was filed before the Registrar of Companies. It would, therefore, prove that all the share holders exist and they have confirmed making investment in the assessee company. It is also not in dispute that it was first year of business of assessee because it was incorporated on 19.09.2002. It is also not in dispute that construction of the cold storage was completed by the end of Feb. 2004 and thereafter, the assessee started functioning as cold storage. The assessee filed details of the amount received from all the share holders and it would prove that majority of the share application money was received prior to commencement of business by the assessee. Therefore, same could not be treated as undisclosed income of the assessee. ITAT, Agra Bench in the case of DCIT vs. Surajmal Cold Storage (P) Ltd. (supra) held as under :-
"23. We have heard the ld. Representatives of the parties and records perused. The crux of the matter to examine in the case under consideration whether under the facts and circumstances the CIT(A) is correct in deleting the addition on account of cash credit and share application money made by the A.O. under section 68 of the Act. Section 68 of the Act empowers the A.O. to treat any sum found credited in he books of account of the assessee for any previous year, 7 ITA No. 79/Agra/2012 if the assessee fails to offer an explanation about the nature and sources of such fund or if the explanation offered by the assessee is not, in the opinion of the AO, satisfactory, as income from undisclosed sources and charge the same to tax as income of the assessee of that previous year. The power of the A.O. under section 68 is not an absolute one. It is subject to his satisfaction where an explanation is offered. The power is absolute where the assessee offers no explanation. The satisfaction with regard to the explanation is in effect an in-built safeguard in section 68 protecting the interest of the assessee. It provides for an opportunity to the assessee to explain the nature and source of the fund. Once it is explained, it is incumbent on the A.O. to consider the same and form an opinion whether the explanation is satisfactory or not. If the conclusion is adverse wholly or in part to the interest of the assessee, it is incumbent on the A.O. to intimate or inform the conclusion arrived at to the assessee. When such information or intimation is received by the assessee, the onus shifts on the assessee. He may furnish further explanation or information to support its contention. If further information or materials are furnished, the A.O. is bound to examine the same and form his final opinion and pass an appropriate order. As stated above that section 68 suggests that there has to be credit of amounts in the books maintained by the assessee, that such credit has to be of a sum during the previous year, and that the assessee offers no explanation about the nature and source of such credit found in the books or the explanation offered by the assessee, in the opinion of the Assessing Officer, is not satisfactory. It is only then the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The expression 'the assessee offers no explanation' means where the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. It is true that the opinion of the A.O. for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the A.O. is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion.
24. As regards the burden of proof, it is settled position of law in respect of cash credit that the burden is on the assessee to explain the 8 ITA No. 79/Agra/2012 three ingredients namely, identity, creditworthiness & genuineness of the transaction.
25. With the above background of general discussion in respect of section 68 of the Act, now we come to have discussion regarding section 68 of the Act and share application money. Where the matter concerns money receipts by way of share application from investors, the assessee has to prove the existence of the person in whose name the share application is received. Once the existence of the investor is proved, it is not further the burden of the assessee to prove whether that person itself has invested the said money or some other person has made investment in the name of that person. The burden then shifts on to the revenue to establish that such investment has come from the assessee-company itself. Once the receipt of the confirmation letter from the creditor is proved and the identity and the existence of the investor has not been disputed, no addition on account of share application money in the name of such investor can be made in the assessee's hands.
26. The identity of the shareholder can be proved by either producing the person before the A.O. or by way of documents, registered address, PAN etc. The genuineness of the transaction can be shown from the fact that the money has been received from the share holder. If the money is received by cheque and is transmitted through banking or other indisputable channels, the genuineness of transaction would be proved unless otherwise material found. Other documents showing the genuineness of transaction could be the copies of the shareholders register, share application forms, share transfer register, etc. The creditworthiness of the creditor/subscriber can be proved by producing the bank statement of the creditors/subscribers showing that it had sufficient balance in its accounts to enable it to subscribe to the share capital. Once these documents are produced, the assessee would have satisfactorily discharged the onus cast upon him. The A.O. can discredit the documents produced by the assessee with cogent reasons and materials but not on the realm of suspicion. In this regard, we would like to refer some judicial pronouncements which are as under :-
27. Hon'ble Andhra Pradesh High Court in the case of CIT vs. Lanco Industries Ltd., 242 ITR 357(A.P.) observed that how merely by reason of unsatisfactory explanation relating to the source of 9 ITA No. 79/Agra/2012 investment by the shareholders, the money invested on shares should be treated as income of the assessee. If the ostensible shareholders failed to explain the means of investment, that should have been treated as unexplained income in their hands. In order to add it to the income of the assessee there must be a further finding that in fact the shareholders were mere name-lenders and the money allegedly invested by them really belonged to the directors of the assessee-
company. In the absence of a finding that the persons to whom the share certificates were issued on receipt of consideration as per the book entries were in fact dummies or stooges of the directors of the assessee-company, the same cannot be treated as unaccounted income of the assessee. There was no such finding by the assessing authority.
28. Hon'ble Karnataka High Court in the case of Tam Tam Pedda Guruva Reddy vs. JCIT (Assessments) & Another, 291 ITR 44 (Karn) held as under :- (headnote page 45) "Held, allowing the appeal, (i) that the affidavit filed by R showed that he had income from agriculture and from business and that he had two fixed deposits which had matured during the said period. Therefore, the source of income had been clearly spelt out and this credit could not be treated as unexplained credit in terms of section 68. The finding of the authority that the said amount was unexplained income could not be accepted."
29. The Hon'ble Patna High Court in the case of Sarogi Credit Corporation vs. CIT, 103 ITR 344 (Pat.) held as under :- (headnote page nos.344, 345 & 346) "In the books of account of the assessee for the previous year relevant to the assessment year 1962-63, there were credit entries in the name of Z for Rs.12,000 and in the name of R for Rs.8,000. Both Z and R gave statements before the Income Tax Officer that they had deposited the amounts with the assessee. The Income Tax Officer did not accept those statements and added a sum of Rs.20,000 as income of the assessee from undisclosed sources. On appeal, the Appellate Assistant Commissioner deleted the addition. On further appeal, the Appellate Tribunal held that the deposits by Z and R remained unexplained, that the mere admission of the depositors could not lead to the conclusion that they were in a position to advance the moneys to the assessee and, since the assessee could not prove that the depositors were in a position to make the deposits to the extent they stood in the books, the onus that lay on the assessee under section 68 of the Income Tax Act, 12961, had not been discharged. The Tribunal 10 ITA No. 79/Agra/2012 also found that as the depositors were doing some business and later filed income tax returns, it would be fair and reasonable to allow a sum of Rs.5,000/- as effectively explained but the remaining Rs.15,000 should be added to the income of the assessee. On a reference at the instance of the assessee:
Held, that if the credit entry in the books of the assessee stands in the name of the assessee or the assessee's wife and children, or in the name of any other close relation or an employee of the assessee, the burden lies on the assessee to explain satisfactorily the nature and source of the entry. But if the entry does not stand in the name of any such person having a close relation or connection with the assessee, but in the name of an independent party, the burden will still lie on him to establish the identity of that party and to satisfy the Income Tax officer that the entry is real and not fictitious. Once the identity of the third party is established before the Income Tax Officer and other such evidence are prima facie placed before him pointing to the fact that the entry is not fictitious, the initial burden lying on the assessee can be said to have been duly discharged by him. It will not, therefore, be for the assessee to explain further as to how or in what circumstances the third party obtained the money or how or why he came to make an advance of the money as a loan to the assessee. Once such identity is established and the creditors, as in the present case, have pledged their oath that they have advanced the amounts in question to the assessee, the burden immediately shifts on to the department to show as to why the assessee's case could not be accepted and as to why it must be held that the entry, though purporting to be in the name of a third party, still represented the income of the assessee from a suppressed source. And, in order to arrive at such a conclusion, even the department has to be in possession of sufficient and adequate materials.
The Income tax officer's rejection, not of the explanation of the assessee, but of the explanation regarding the source of income of the depositors, could not by itself lead to any inference regarding the non- genuine or fictitious character of the entries in the assessee's books of account. The Appellate Assistant Commissioner clearly pointed out that the findings recorded by the Income Tax Officer were not positive findings.11 ITA No. 79/Agra/2012
Further, the Tribunal had partly accepted the source to the extent of Rs.5,000 and partly rejected it to the extent of Rs.15,000. Having accepted the genuineness of the entries in the books of account, having accepted the explanation offered by the third parties with regard to their sources of money in part at least, there was no material for the Tribunal to hold that the assessee had not discharged the onus on him and the finding to that effect must be held to be without any evidence and, hence, wholly illegal and the conclusions drawn perverse.
Therefore, the assessee had discharged the onus within the meaning of section 68 of the Act for the cash credits and the Appellate Tribunal was not justified in maintaining the addition of Rs.15,000 as the assessee's income from undisclosed sources."
30. The Hon'ble Delhi High Court in the case of CIT vs. (1) Divine Leasing & Finance Limited (2) General Exports & Credits Limited & (3) Lovely Exports Pvt. Ltd, 299 ITR 268 (Delhi) held as under :-
(page nos. 275 to 276) "We find it indeed remarkable that the attention of the Sophia Finance the Full Bench had not been drawn to the decision of the Supreme Court in CIT v. Orissa Corporation P. Ltd. [1986] 159 IR 78, which if cited would really have left no alternative to the Full Bench but to arrive at the conclusion it did. The books of account of the assessee contained three cash credits aggregating Rs.1,50,000 allegedly received as loans from three individual creditors under hundis. Letters of confirmation as well as the discharged hundis were produced; but notices/summons sent to hem remained unnerved because they had reportedly "left" that address. The view of the Tribunal was that merely because the assessee could not produce these there parties, there was nevertheless no justification to draw an adverse inference. This approach as accorded approval by the Supreme Court in these words (page 84) :
"In this case, the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income tax assessees. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under section 131 at the instance of the assessee, did not pursue the matter further. The Revenue did not examine the source of 12 ITA No. 79/Agra/2012 income of the said alleged creditors to find out whether they were creditworthy or were such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do anything further. In the premises, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises."
(Page no.276) "Sumati Dayal v. CIT [1995] 214 ITR 801 (SC) a succinct yet complete précis on the essentials of income tax liability can be discerned from these words (headnote): "In all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision and if the receipt is in the nature of income, the burden of proving that it is not taxable because it falls within the exemption provided by the Act lies upon the assessee." This decision is adequate authority for the proposition that by virtue of section 68 of the Income Tax Act the assessee is obliged to establish that amounts credited in the accounts do not represent its income; in that case the assessee's version that she had won them through betting on horse racing in two consecutive years did not attract credibility."
(Page nos.279 to 283) "The Calcutta High Court has held in CIT v. Precision Finance P. Ltd. [1994] 208 ITR 465 that it is not sufficient for an assessee to disclose that credits in their books had been received through banking channels; the identity as well as the creditworthiness of the creditor must nevertheless be proved. In Sajan Dass and Sons v. CIT [2003] 264 ITR 435 (Delhi) the Division Bench was not convinced that merely because moneys could be identified and traced through banking channels the genuineness of the gift in question stood established. This is obviously because an assessee can scarcely be heard to say that he does not know all particulars pertaining to the donor. Thereafter, the same dialectic led the bench to arrive at the opposite conclusion in CIT v. R.S. Sibal [2004] 269 ITR 429 (Delhi). In CIT v. Makhni and Tyagi P. Ltd. [2004] 267 ITR 433, this court has not given its imprimatur to the inaction of the Assessing Officer in doing nothing further after the issuance of summons under section 13 ITA No. 79/Agra/2012 131 of the Income Tax Act. It did not condone the Assessing Officer, failing to issue coercive process, and in this manner attempting incorrectly to shift the burden on the assessee to establish the legitimacy of the transaction. In CIT v. Antartica Investment P. Ltd. [2003] 262 ITR 493 (Delhi), the court was satisfied that no interference was justified since the assessee had produced the share application forms along with confirmation letters and copies of their accounts, copies of their bank accounts of cheque payments and their auditor's report. The Assessing Officer's conclusion that the genuineness of the transaction had not been made good was not upheld. This conclusion was reached despite the fact that notices received by one of the common directors of the two subscribing companies had been ignored and no information was forthcoming from the latter. However, the Under Secretary (Land Revenue, Government of Sikkim, Gangtok) had stated that both the subscribing companies were incorporated in Sikkim and their addresses were disclosed in the return of allotments; the subscribers thus stood identified. Their financial standing or capacity was not investigated by the court. The decision in CIT v. Achal Investment Ltd. [2004] 268 ITR 211(Delhi) is also on the same lines.
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 absence of culpability and complexity of the assessee it should not be harassed by the Revenue'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 sections 68 & 69 of the Income Tax Act. The burden of proof can seldom be discharged to the hilt by the assessee; if the Assessing Officer 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 wrong or illegal dealings, he cannot obdurately adhere to 14 ITA No. 79/Agra/2012 his suspicions and treat the subscribed capital as the undisclosed income of the company.
In CIT v. S. Kamaraja Pandian [1984] 150 ITR 703, the Madras High Court took the view that it is for the assessee to initially prove the genuineness of the loan, and that the onus shifts to the Department only after the assessee has prima facie substantiated this fact. In that case, one of the creditors had denied the transaction. The Patna High Court in Addl. CIT v. Hanuman Agarwal [1985] 151 ITR 150 was faced with the availability of a confirmatory letter filed by the assessee in whose books of account a credit was found. GIR number of the creditor was supplied, and it appears that he had confessed that this transaction was not genuine. The High Court did not act on the confession since it had not been made available to the assessee. The Bench observed that since the correct name and address, and the GIR number of the creditor had been supplied by the assessee the initial onus under section 68 of the Income Tax Act had been "completely discharged" by the assessee. It could not be sanguine to conceive of a possibility of a genuine contributor abandoning his investment for diverse reasons. That would not lead to the conclusion that the assessee is automatically guilty of attempt of converting its income into capital.
In Bharati P. Ltd. v. CIT [1978] 111 ITR 951 (Cal) where notices to these alleged creditors had come back unserved, the Division Bench affirmed that the mere filing of confirmatory letters by the assessee did not discharge the onus that lay on the assessee. Different Division benches of the same High Court have opined that the assessee must approve (a) the identity, (b) the capacity of the creditors to advance money, (c) the genuineness of the transaction. (See Shankar Industries v. CIT [1978] 114 ITR 689 (Cal), C. Kant and Co v. CIT [1980] 126 ITR 63 (Cal) and CIT v. United Commercial and Industrial Co. P. Ltd. [1991] 187 ITR 596 (Cal.). In CIT v. Korlay Trading Co. Ltd. [1998] 232 ITR 820 (Cal), certain shares purchased through a broker were lost. The assessee furnished the name of the broker, as also the date of the sale, amount of purchase money and sale money. The broker was found not to have maintained regular accounts. However, the court refused to draw an inference adverse to the assessee's interests. Instead the Calcutta High Court observed that the Income Tax Officer ought to have investigated the matter more thoroughly to controvert the claim of the 15 ITA No. 79/Agra/2012 assessee, and concurred with the conclusion of the Tribunal that the latter had discharged the initial burden that lay on it. The High Court set aside the decision of the Tribunal which had reversed the findings of the Income Tax Officer as well as the Commissioner of Income Tax (Appeals) since the assessee had supplied the income tax file number of the creditor before it. The High Court noted that the mere filing of the income tax number was not sufficient to establish the identity and creditworthiness of the creditor and genuineness of the transaction. Although Orissa Corporation [1986] 159 ITR 78 (SC) was referred to the decision of the Full Bench of this court in Sophia Finance [1994] 205 ITR 98 was not even cited. Korlay Trading [1998] 232 ITR 820 (Cal.) as well as Sophia Finance [1994] 205 ITR 98 (Delhi) was applied by the same Division Bench of the Calcutta High Court in four decisions delivered in March 2003. In Hindusthan Tea Trading Co. Ltd. v. CIT [2003] 263 ITR 289, the Bench opined that in the case of a subscription to the share capital of a company, if section 68 of the Income Tax Act is to be resorted to, it is necessary for the assessee to prove and establish the identity of the subscriber, their creditworthiness and the genuineness of the "transaction". Once material to prove these ingredients are produced it is for the Assessing Officer to find out as to whether, on these materials, the assessee has succeeded in establishing the ingredients mentioned above. The Assessing Officer can "lift the veil" and enquire into the real nature of the transaction. CIT v. Ruby Traders and Exporters Ltd. [2003] 263 ITR 300 (Cal), CIT v. Nivedan Vaniya Niyojan Ltd. [2003] 263 ITR 623 (Cal) and CIT v. Kundan Investment Ltd. [2003] 263 ITR 626 (Cal) are the other three.
In this analysis, a distillation of the precedents yields the following propositions of law in the context of section 68 of the Income Tax 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 of 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 assessee. (5) The Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its 16 ITA No. 79/Agra/2012 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.
For a complete understand of the concept of "burden of proof"
attention should be drawn to the decisions delivered in the context of penalty proceedings under section 271 of the Income Tax Act. CIT v. Anwar Ali [1970] 76 ITR 696 was decided by the Apex Court holding that, if there is no evidence on record except the explanation of the assessee, which explanation has been found to be false, it still does not follow that the receipt constitutes taxable income. This decision was followed by the Apex Court in Anantharam Veerasinghaiah and Co. v. CIT [1980] 123 ITR 457 opining that the (headnote) "mere falsity of the explanation given by the assessee is insufficient without there being, in addition, cogent material or evidence from which the necessary conclusion attracting a penalty could be drawn."
However, as has been noted in Addl. CIT v. Jeevan Lal Sah [1994] 205 ITR 244 (SC); [1995] Supp. (4) SCC 247 amendments were incorporated by the Finance Act, 1964, into section 271 which had deleted the word "deliberately" in its sub-section (1)(c), thereby shifting the onus of proof onto the assessee, rendering Anwar Ali [1970] 76 ITR 696 (SC) ineffectual. Nevertheless, in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14 it has been enunciated by the Supreme Court that though the explanation shifts the burden to the assessee to show absence of fraud, this onus is a rebuttable one. The burden is not discharged by the assessee tendering an incredible or fantastic explanation; and very explanation does not have to be accepted. In our opinion, it is for Parliament to introduce legislation if the duty presently resting on the Department is thought to be too onerous. We ought not to twist the language of a statute to remove the burden of proof altogether from the Department even though it has the necessary wherewithal to discharge it. The malaise can also be arrested if unclaimed share subscriptions are taken over by the State and/or if the assessee concerned is precluded from distributing dividends, bonus shares, etc., against such share subscriptions unless they are duly claimed by the original subscribers within a prescribed period, perhaps not exceeding three years. Thereafter, the shares 17 ITA No. 79/Agra/2012 could automatically stand transferred to the State on the principle of escheat. For these events to happen, requisite amendments to the Income Tax Act may be required."
31. The above judgement of Delhi High Court in the case of CIT vs. (1) Divine Leasing & Finance Limited (2) General Exports & Credits Limited & (3) Lovely Exports Pvt. Ltd, 299 ITR 268 (Delhi) confirmed by the Apex Court as under :-
(319 ITR (Statutes) page nos.5 & 6) "Share application moneys received by company 11-1-2008: Their Lordships S.H. KAPADIA and B. SUDERSHAN REDDY JJ. Dismissed the Department's special leave petition against the judgement dated November 16, 2006 of the Delhi High Court in I.T.A. No.953 of 2006 reported in 299 ITR 268, whereby the High Court affirmed the deletion by the Tribunal of additions made on account of sums received from directors of promoters and also by way of a public issue. The court while dismissing the special leave petition held as follows:-
"Can the amount of share money be regarded as undisclosed income under section 68 of the Income Tax 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 Assessing Officer, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgement": CIT v. LOVELY EXPORTS P. LTD. : S.L.P. (Civil) No.1153 of 2008."
32. Another aspect of the matter is whether addition under section 68 of the Act can be made before start of business by the assessee. In this regard, we would like to refer the following judgements :-
33. The Hon'ble Supreme Court in the case of CIT vs. Bharat Engineering & Construction Co., 83 ITR 187 (SC) held as under :-
(page nos.188 & 189) "The assessee-company is an engineering construction company. It commenced business in May, 1943. In their account 18 ITA No. 79/Agra/2012 books, there are several cash credit entries in the first year of its business. We are concerned with only five of those cash credit entries. On 1st June, 1943, there is a cash credit entry of Rs.1,00,000. On 6th July, 1943, there is a cash credit entry of Rs.50,000. On 30th Aug, 1943, there is a cash credit entry of Rs.50,000. On 2nd Dec., 1943, there is a cash credit entry of Rs.15,000 and on 15th March, 1944, there is a cash credit entry of Rs.35,000. These cash credit entries total up to Rs.2,50,000. The ITO called upon the assessee to explain those cash credit entries. The explanation given by the assessee was found to be false by the ITO, the AAC and the Tribunal. But, all the same, the Tribunal felt that these cash credit entries could not represent the income or profits of the assessee-company as they were all made very soon after the company commenced its activities. In our opinion, though the order of the Tribunal is not happily worded, its finding appears to be that in the very nature of things the assessee could not have earned such a huge amount as profits very soon after it commenced its activities. A construction company takes time to earn profits. It could not have earned profit of Rs.1,00,000 within a few days, after the commencement of its business. Hence, it is reasonable to assume that those cash credit entries are capital receipts though for one reason or other the assessee had not come out with the true story as regards the person from whom it got those amounts. It is true that in the absence of satisfactory explanation from the assessee the ITO may assume that cash credit entries in its books represent income from undisclosed sources. But what inference should be drawn from the facts proved is a question of fact and the Tribunal's finding on that question is final."
34. The Hon'ble Allahabad High Court in the case of India Rice Mills vs. CIT, 218 ITR 508 (All.) held as under :- (headnote page nos. 508 & 509) "The assessee-firm which was constituted on August 12, 1977, became operative from February 2, 1978. During the period from 1977 to February, 1978 ten partners of the firm made capital contributions, totaling Rs.1,43,000. Since this was credited in the books of the firm the firm was called upon by the assessing authority to explain the source of the deposit. All the partners had filed returns after the close of the accounting year of the firm and they had not filed any returns in earlier years. Therefore, the assessing authority held that the amount represented the income of the assessee-firm from undisclosed sources. On appeal, the Commissioner of Income Tax 19 ITA No. 79/Agra/2012 (Appeals) held that as the deposits were made by the partners before the firm started its business, the same could not be taken to be the income of the firm from undisclosed sources. The Tribunal held that as the amount was credited in the books of the assessee-firm, it was for the assessee-firm to explain the sources of deposits. On a reference :
Held, that all the deposits came to be made during the accounting year in the books of the assessee-firm before it started its business and the deposits represented the capital contribution of the partners. It was for the partners to explain the source of deposits and if they failed to discharge the onus then such deposits could be added in the hands of the partners only. These deposits could in no case be the income of the assessee-firm because the firm started its business after the credits had been made in its books."
35. In the light of above discussions, if we consider the facts of the case under consideration, we find that the assessee has discharged the burden in respect of share application money by furnishing complete details in the form of share certificate, affidavit, khasra khatauni, kisan bahi, KCC ledger account, bank accounts and others. The assessee has filed a chart in which details were furnished along with relevant page nos. of Paper Book of each and every party. The CIT(A) before deleting the addition incorporated detailed chart of the evidence filed by the assessee which he has reproduced at page nos.3 to 5 of his order. In the light of the law laid down by the Apex Court in the case of Lovely Exports, (319 ITR (Statutes) page nos.5 & 6), we find that the CIT(A) has rightly deleted the addition of Rs.79,22,000/- on account of share application money received by the assessee. The CIT(A) also took care of Revenue by giving directions that the deposits are liable to be examined and any conclusion, as to whether such funds are explained or unexplained, are liable to be drawn in their respective cases. In respect of loan of Rs.25,51,000/-, we find that the assessee has also discharged its burden cast under section 68 of the Act. We notice that some of the loans were given by the same persons who had applied for share application money. When the assessee has discharged his burden in respect of share application money and furnished sufficient material, under the circumstances, it cannot be held that the share application money was genuine transaction and loan transaction was bogus. It is pertinent to mention that inspite of details furnished by the assessee, the A.O. did not 20 ITA No. 79/Agra/2012 examine any of the creditors before rejecting the assessee's contention and documents furnished. The A.O. examined two persons wherein they confirmed that they had applied for the shares of the company and share application amount was given by them. Under the facts and circumstances, when the assessee discharged its burden by furnishing necessary evidence and material in respect of identity, creditworthiness and genuineness and there is no contrary material to the finding of the CIT(A) on record or neither has been pointed out at the time of hearing. We are, therefore, inclined to uphold the order of CIT(A).
36. Apart from the fact that the assessee has discharged the burden cast under section 68 of the Act, we notice that the assessee company incorporated w.e.f. 03.06.2003, therefore, in the light of judgement of Hon'ble Supreme Court in the case of CIT vs. Bharat Engineering & Construction Co., 83 ITR 187 (SC), the addition is not warranted."
6.1 Hon'ble Supreme Court in the case of CIT vs. Lovely Exports (P) Ltd.
(supra) held as under :
"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, but it cannot be regarded as undisclosed income of the assessee company."
6.2 Hon'ble Allahabad High Court in the case of Jaya Securities Ltd. vs. CIT(supra) held as under :
Section 68 of the Income-tax Act, 1961 - Cash Credits - Assessment years 1996-97 and 1997-98 - Whether any addition under section 68 can be made in respect of investment made by different persons in share capital of assessee-company, limited by shares, whether public or private - held, no."21 ITA No. 79/Agra/2012
6.3 Hon'ble Supreme Court in the case of CIT vs. Bharat Engineering and Construction Co. (supra) held as under :-
"Though the order of the Tribunal is not happily worded, its finding appears to be that in the very nature of things the assessee could not have earned such a huge amount as profits very soon after it commenced its activities. A construction company takes time to earn profits. It could not have earned a profits of Rs.1,00,000 within a few days, after the commencement of its business. Hence, it is reasonable to assume that those cash credit entries are capital receipts though for one reason or other the assessee had not come out with the true story as regards the person from whom it got those amounts. It is true that in the absence of satisfactory explanation from the assessee the ITO may assume that cash credit entries in its books represent income from undisclosed sources. But what inference should be drawn from the facts proved is a question of fact and the Tribunal's finding on that question is final. - Judgment and order dt. 12th Jan., 1968 of the Allahabad High Court in IT Ref. Appln. No. 151 of 1964 affirmed."
6.4 Hon'ble Allahabad High Court in the case of CIT vs. Jaiswal Grains Store (supra) held as under :
"The assessee ran a store in the name of J. During the assessment proceedings for the assessment year 1976-77, the Income- tax Officer noticed that the three partners invested Rs.5,000 each on August 1, 1975, the first day of the accounting period relevant to the assessment year in question. The Income-tax Officer added the entire amount of Rs.15,000 as income from undisclosed sources. The Tribunal deleted the addition. On a reference :
Held, that the deposit of Rs.5,000 by each of the partners was made on the first day of the start of the assessee's business. On the first day of the business, it could not be assumed that the assessee, which was a firm, though assessed in the status of an association of persons had unexplained income of Rs.15,000. The addition had been rightly deleted."22 ITA No. 79/Agra/2012
7. Considering the facts of the case, evidences available on record and in the light of above decisions, it is clear that the assessee had discharged burden in respect of genuine receipt of share application money by furnishing complete details in the form of share applications, declaration, affidavit, Khasra, Khatoni, income certificates and identity proofs and others. It is also not in dispute that shares were actually allotted to all the share holders and details of the same have been furnished before the Registrar of Companies. In the light of the above decisions, we are of the view that the assessee has proved the existence of share holders and their creditworthiness. It is also not in dispute that majority of share application money was received prior to actual commencement of business by the assessee. Therefore, the same could not be held to be undisclosed income of the assessee u/s. 68 of the IT Act in the light of judgment of Hon'ble Supreme Court in the case of CIT vs. Bharat Engineering & Construction Co. (supra). In view of the above, we do not find any justification for the authorities below to have made addition against the assessee. We accordingly set aside the orders of the authorities below and delete the addition of Rs.14,65,000/- in the result, ground No. 1 to 3 of appeal of the assessee are allowed.
8. On ground No. 4 & 5, the assessee challenged the disallowance of Rs.2,53,124/- out of depreciation on plant and machinery. The AO while allowing depreciation has reduced the value of subsidy out of the cost of plants and 23 ITA No. 79/Agra/2012 machinery and thus, made disallowance of Rs.2,53,124/- from the depreciation. According to the AO, the assessee has received subsidy to the extent of Rs.20,25,000/- from NABARD which has not been reduced from the cost of plant and machinery which was shown as subsidy received by the assessee in the capital account. Therefore, the AO allowed depreciation to the assessee after reducing the subsidy from the cost of plant and machinery. It was submitted before the ld. CIT(A) that the assessee company is running a multi chamber cold storage facility with two chambers for preservation of potatoes at Agra. The cold storage was constructed and installed during the year itself. The assessee had received advance installment of capital subsidy amounting to Rs.20,25,000/- from NABARD, which was duly accounted for in the books of account of the assessee. The Banker of the assessee company has received advance installment of back ended capital subsidy of Rs.20,25,000/- from National Bank for Agriculture and Rural Development under the capital investment subsidy scheme for construction/extension/modernization of cold storage for horticulture produce. The subsidy is admissible to the borrower under the scheme will be kept in subsidy reserve account - borrower-wise in the books of account of the financing banks. The adjustment of subsidy from bank term loan will be on the pattern of back ended subsidy. As the subsidy is not available at the disposal of the assessee and even it was not adjusted by bank from the term loan account as per terms of the scheme, therefore, the advance installment of subsidy was not a final amount until 24 ITA No. 79/Agra/2012 the completion of project. Therefore, this subsidy was not final amount or a determined value for any purpose. As per this scheme, the assessee is eligible for subsidy @ 25% of the total project cost. Therefore, no deduction is justified. The assessee relied upon the decision of the Supreme Court in the case of ITO vs. P.J. Chemicals Ltd and others, 210 ITR 830. It was submitted that the final amount on the subsidy is determined only on the completion of project and further subsidy was not related to the plants and machinery only. Therefore, the addition was unjustified. The ld. CIT(A), however, did not accept the contention of the assessee and dismissed the appeal of the assessee by following the definition of actual cost as per section 43(1) of the IT Act.
9. The ld. counsel for the assessee reiterated the submissions made before the authorities below and submitted that the assessee has shown the amount of subsidy in liability and asset of the balance sheet (PB-5) because the subsidy amount under the scheme was not received by the assessee. It is available to the bank only and no term loan is allowed on the same. Therefore, the assessee cannot use this amount of subsidy. No interest is also allowable to the assessee (PB-252). Therefore, he has submitted that disallowance is unjustified. However, he could not explain as to in which year the final amount was determined on the completion of project. He has relied upon the decision of the Supreme Court in the case of P.J. Chemicals Ltd. (supra) and order of ITAT, Agra Bench in the case of DCIT vs. Smt. Chari 25 ITA No. 79/Agra/2012 Agarwal in ITA No. 236/Agra/2010. On the other hand, the ld. DR relied upon the orders of the authorities below.
10. We have considered the rival submissions and the material on record and find that the matter requires reconsideration at the level of the AO. The assessee has specifically pleaded before the authorities below that the assessee company is running multi chamber cold storage facility at Agra and cold storage was constructed during the year itself. The assessee had received advance installment of capital subsidy from NABARD, which was duly accounted for in the books of account of the assessee because the banker of the assessee company has received advance installment of back ended capital subsidy from NABARD under the capital scheme subsidy scheme for construction of cold storage. The assessee also explained that subsidy is admissible to the borrower under the scheme will be kept in subsidy reserve account - borrower-wise in the books of accounts of the financing banks. The adjustment of subsidy from bank term loan will be on the pattern of back ended subsidy. The subsidy is not available at the disposal of the assessee and even it is not adjusted by the bank from term loan account as per terms of the scheme. The advance installment of subsidy was not final amount until completion of project. Therefore, this subsidy was not final amount or a determined value for any purpose. The subsidy was not related to any specific asset, rather it was related to total cost of the project. It would, therefore, prove that 26 ITA No. 79/Agra/2012 the assessee has not actually received the subsidy in the year under consideration. The assessee in the balance sheet has given treatment to the subsidy both in liability and the asset. It is available to the bank and no term loan or interest is allowable. Since it was claimed that it was a advance installment of capital subsidy, it was not a final amount until completion of the project, therefore, such facts of completion of project and availability of subsidy on accrual method as availability of subsidy to the assessee on final determination of the cost of project, should have been considered by the authorities below in proper perspective. The assessee before us has not given complete facts as when the subsidy would accrue/received by the assessee on completion of project. Therefore, neither the AO nor the assessee have brought complete facts on record for determination of issue involved on this ground. Therefore, it is necessary that the AO should verify the scheme in question and should also verify whether the subsidy is dependent upon the determination of final amount on completion of project and as to when such completion is done in this case. Therefore, accrual of subsidy in favour of the assessee is a necessary ingredient to be determined by the AO according to the scheme. In the absence of complete details, we set aside the orders of the authorities below and restore this issue to the file of AO with the direction to re- decide this issue in accordance with law by giving reasonable opportunity of being heard to the assessee. The assessee may cite the same decisions before the AO as have been cited before us for the purpose of determination of the issue once for all. 27 ITA No. 79/Agra/2012 In the result, grounds No. 4 & 5 of the appeal of the assessee are allowed for statistical purposes.
11. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court.
Sd/- Sd/-
(A.L. GEHLOT) (BHAVNESH SAINI)
Accountant Member Judicial Member
*aks/-
Copy of the order forwarded to :
1. Appellant
2. Respondent
3. CIT(A), concerned By order
4. CIT, concerned
5. DR, ITAT, Agra
6. Guard file Sr. Private Secretary
True copy