Delhi High Court
Commissioner Of Income Tax vs Himalaya International Ltd. on 30 July, 2007
Equivalent citations: (2008)214CTR(DEL)437
Author: V.B. Gupta
Bench: Madan B. Lokur, V.B. Gupta
JUDGMENT V.B. Gupta, J.
1. Admit After hearing learned Counsel for the parties, the following substantial question of law is framed for consideration:
Whether the Tribunal was correct in law in deleting the addition of Rs. 5,87,27,000 made by the AO under Section 68 of the IT Act, 1961 ?
2. Revenue has challenged the order dt. 17th March, 2006 passed by the Income-tax Appellate Tribunal (for short as 'Tribunal') in the case of assessed in miscellaneous application No. 734/Del/2005 in ITA No. 5087/Del/2004 for the asst. yr. 2000-01 vide which the Tribunal deleted the addition of Rs. 5,87,27,000 made by the AO on account of share capital holding that the assessed had duly identified and established the existence of share applicants in question and no material has been brought on record by the AO to doubt the genuineness of the assessed's shares issue.
3. The assessed is engaged in the business of growing mushrooms and ') manufacturing calcium carbonate. During the assessment proceedings, the AO found that the assessed had shown credits of Rs. 5,87,27,000 in the balance sheet.
4. In spite of repeated opportunities, the assessed failed to discharge the onus to file requisite confirmations substantiating the genuineness, creditworthiness and identity of the persons/creditors. The assessed furnished only the list of shareholders but not their addresses and, as such, the AO could not verify the correctness of the claim made by the assessed and, therefore, made an addition, of Rs. 5,87,27,000 to the income of the assessed under Section 68 of the IT Act, 1961 (for short, as 'Act') treating the same as income from undisclosed sources.
5. The assessment order passed by the AO was challenged before the Commissioner of Income-tax (Appeals) ['CIT(A)' for brevity]. The CIT(A) held that the assessed has failed to establish the creditworthiness and genuineness of the transactions to the satisfaction of the AO, and accordingly, confirmed the addition made by the AO.
6. Thereafter, the assessed filed an appeal before Tribunal. The Tribunal through oversight omitted to adjudicate upon the assessed's ground of appeal with regard to addition of cash credit/share capital made by the AO as confirmed by CIT(A) and as such the assessed moved a miscellaneous application. Vide impugned order, the Tribunal deleted the addition made by the AO holding that no material has been brought on record by the AO to doubt the genuineness of the assessed's shares issue.
7. It has been contended by learned Counsel for the Revenue that under 1 Section 68 of the Act onus is upon the assessed to establish the identity of the subscribers of the shares and he has to prove the creditworthiness and genuineness of the transaction, which he has failed to do.
8. On the other hand, learned Counsel of the assessed has argued that the assessed has furnished the addresses of the shareholders and the payments have been made by account payee cheque and as such there is no reason to doubt the creditworthiness of the creditors and the genuineness of the transaction. In support of his contentions learned Counsel cited a decision of Division Bench of this Court in CAT v. Divine Leasing & Finance Ltd. (2007) 207 CTR (Del) 38 : (2007) 158 Taxman 440 (Del)
9. As per findings of the Tribunal, the CIT(A) did not dispute the assessed's contentions that payments have been made by account payee cheques and addresses of the shareholders had been furnished. However, CIT(A) held that the assessed failed to establish the creditworthiness of the cash creditor and genuineness of the transactions.
10. Further, the Tribunal in its order states that:
from the particulars furnished by the assessed it is clear that the assessed has duly identified and established the existence of the share applicants in question and no material has been brought on record to doubt the genuineness of the assessed's share issue.
It is apparent from the order of the Tribunal that it has not gone into the question of creditworthiness of creditors and genuineness of the transaction.
11. In Divine Leasing & Finance Ltd. (supra), the assessed company commenced its business of extending finance to the industrial* enterprises in January, 1984. The assessed received subscription to public issue in the asst. yrs. 1984-85 to 1986-87 from the directors/promoters and also by way of a public issue through the banking channels and thereafter allotted the shares to the subscribers. The AO made certain additions on account of amount received by way of share capital by the assessed under Section 68. the CIT(A) deleted the impugned additions. The Tribunal upheld the order of the CIT(A) on the ground that the AO had not brought any evidence to indicate that any part of the share capital represented the company's own income from undisclosed sources.
12. On appeal, this Court held that:
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 absence of culpability and complexity of the assessed it should not be harassed the Revenue's insistence that it should prove the negative. In the case of 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 AO for his perusal, all the informations 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 and 69 of the IT Act. The burden of proof can seldom be discharged to the hilt by the assessed; 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 AO fails to unearth any wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the company."
Further, a distillation of the precedents yields the following propositions of law in the context: of Section 68 of the IT Act. The assessed 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 FAN 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 notice; (6) the onus would not stand discharged if the creditor/subscriber denies or repudiated the transaction set up by the assessed nor should the AO take such repudiation at face value and construe it, without more, against the assessed; (7) the AO is duty-bound to investigate the creditworthiness of the creditor/subscriber, the genuineness of the transaction and the veracity of the repudiation.
13. Since, in the present case, the Tribunal has not gone into creditworthiness of the creditors and genuineness of the transaction, it is a fit case which ought to be remanded to the Tribunal to give its finding on these two issues.
14. Learned Counsel for the Revenue has also stated during the course of argument that she has no objection if the matter is remanded on these issues.
15. Under these circumstances, we remand the matter back to the Tribunal with directions to give its finding on creditworthiness of the creditors and genuineness of the transactions.
Parties are directed to appear before the Tribunal on 20th Aug., 2007.
Accordingly, the present appeal stands disposed of.