Income Tax Dept warns public against cash dealings of Rs 2 lakh or more saying that the receiver of the amount will have to cough up an equal amount as penalty.

Onus to prove creditworthiness of share applicants isn't on assessee once their identity is established

Where assessee established identity of share applicant, burden of proving creditworthiness was not on assessee
Section 68 of the Income-tax Act, 1961 - Cash credit [Share application money] - Whether,        where assessee had established identity of person providing share application money, burden of proving creditworthiness of said person was not on assessee, and, therefore, addition could not be made as cash credit under section 68 - Held, yes [Para 16] [In favour of assessee]

[2013] 35 taxmann.com 444 (Madhya Pradesh)
HIGH COURT OF MADHYA PRADESH
Commissioner of Income-tax, Bhopal (M.P.)
v.
Peoples General Hospital Ltd.*
KRISHN KUMAR LAHOTI, ACTG. CJ. 
AND M.A. SIDDIQUI, J.
M.A.I.T. NO. 27 OF 2008 
IT APPEAL NOS. 89 & 90 OF 2011
JUNE  27, 2013 
FACTS

 The Assessing Officer made addition, holding that share subscription received from a company in Sharjah was undisclosed income of the assessee, as he doubted the creditworthiness of such company.
 On appeal, the Commissioner (Appeals) and the Tribunal deleted the addition on ground that the assessee had proved the identity of the share applicant and burden of proving creditworthiness was not on the assessee.
 On revenue's appeal:
HELD

 In the case of CIT v. Lovely Exports (P.) Ltd. [Application No. 11993 of 2007, dated 11-1-2008], the Apex Court specifically held that if the identity of the person providing share application money is established, then the burden is not on the assessee to prove the creditworthiness of the said person. However, the department can proceed against the said company in accordance with law. [Para 16]
 The position of the present case is identical. It is not the case of any of the parties that the company in Sharjah is a bogus company or a non-existent company and the amount which was subscribed by the said company by way of share subscription was in fact the money of the assessee. In the present case, the assessee had established the identity of investor who had provided the share subscription and it was established that the transaction was genuine, though as per contention of the assessee the creditworthiness of the creditor was also established. In the present case, in the light of the judgment of Lovely Exports (P.) Ltd. (supra), only establishment of the identity of the investor is to be seen. The Delhi High Court also, in the case of CIT v. Divine Leasing & Finance Ltd. [2008] 299 ITR 268/[2007] 158 Taxman 440, considering a similar question held that the assessee-company, having received subscriptions from the public/rights issue through banking channels and furnished complete details of the shareholders, no addition could be made under section 68 in the absence of any positive material or evidence to indicate that the shareholders werebenamidars or fictitious persons or that any part of the share capital represented company's own income from undisclosed sources. [Para 16]
 In view of law laid down by the Apex Court, the substantial questions framed in these appeals do not arise for consideration. Accordingly, all these appeals are dismissed with no order as to costs. [Para 17]
CASE REVIEW

CIT v. Lovely Exports (P.) Ltd. [I.T.Appeal No. 11993 of 2007, dated 11-1-2008] (para 17) followed.
CASES REFERRED TO

CIT v. Divine Leasing & Finance Ltd. [2008] 299 ITR 268/[2007] 158 Taxman 440 (Delhi) (para 9), Bhav Shakti Steel Mines (P.) Ltd. v. CIT[2010] 320 ITR 619/[2009] 179 Taxman 25 (Delhi) (para 9), Amines Plasticizers Ltd. v. CIT [1997] 223 ITR 173 (Gauhati) (para 9), CIT v. G.M. Mittal Stainless Steel Ltd. [2004] 271 ITR 219/[2005] 142 Taxman 349 (MP) (para 9), CIT v. Ruby Traders & Exporters Ltd. [2003] 263 ITR 300/[2004] 134 Taxman 29 (Cal.) (para 9) and CIT v. Lovely Exports (P.) Ltd. [Application No. 11993 of 2007, dated 11-1-2008](para 10).
Sanjay Lal for the Appellant. C.S. AgrawalA.P. SrivastavaSumit NemaA.P. Shroti and Sapan Usrethe for the Respondent.
ORDER

Krishn Kumar Lahoti, Actg. CJ. - This order shall decide all the aforesaid appeals involving similar questions of law, based on similar set of facts.
2. M.A.I.T. No.27/2008 was admitted on 03.07.2008 on the following substantial questions of law:-
"(i) Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified in affirming the decision of the CIT(A) deleting the addition made under section 68 of the Income Tax Act despite the fact that the assessee has failed to discharge its onus of proving capacity of creditor who is a non-resident Indian- Director of Foreign Company and share holder of Assessee Company and genuineness of transaction was not beyond doubt?
(ii) Whether the Tribunal was justified in not extending and dealing with the additional grounds urged by the Revenue, though the same were germane to the lis?"
Thereafter on 03.11.2011 question No.1 was re-framed which reads as under:-
"(i) Whether the Income-tax Appellate Tribunal was correct in law in deleting the addition made by the Assessing Officer in respect of Non-resident Company, which admittedly has contributed share capital, even on the assumption that the assessee has failed to discharge the financial capacity of the NRI Company?"
3. I.T.A. No.89/2011 was admitted on 03.11.2011 on the following substantial questions of law:-
"(i) Whether the Income-tax Appellate Tribunal was correct in law in deleting the addition made by the Assessing Officer in respect of Non-resident Company, which admittedly has contributed share capital, even on the assumption that the assessee has failed to discharge the financial capacity of the NRI Company?
(ii) Whether the Tribunal was justified in not extending and dealing with the additional grounds urged by the Revenue, though the same were germane to the lis?"
4. I.T.A. No.90/2011 was admitted on 03.11.2011 on the following substantial questions of law:-
"(i) Whether the Income-tax Appellate Tribunal was correct in law in deleting the addition made by the Assessing Officer in respect of Non-resident Company, which admittedly has contributed share capital, even on the assumption that the assessee has failed to discharge the financial capacity of the NRI Company?
(ii) Whether the Tribunal was justified in not extending and dealing with the additional grounds urged by the Revenue, though the same were germane to the lis?"
5. As all the matters involve similar questions of law, based on similar set of facts, it would be appropriate if all the aforesaid matters are decided by this common order. For the convenience, facts are taken from M.A.I.T. No.27/2008.
6. In this case return was filed on 13.10.2003 in which income was declared as nil. The assessment order was passed on 01.03.2006 by which the Assessing Officer made an addition of Rs.21,27,50,403/- and assessed the income of the respondent at Rs.21,27,50,403/-. The aforesaid addition was made on the ground that one M/s Alliance Industries Limited, Sharjah had made share subscription to the capital of respondent. The assessing officer doubted creditworthiness of M/s Alliance Industries Limited, Sharjah and directed addition of the amount of share subscription provided by the aforesaid Company to the assessee. In all the three years, the amount of subscription was directed to be made addition in the income of the respondent.
7. Against the order passed by the assessing officer, an appeal was preferred before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) allowed the appeal and directed deletion of the addition. However, in I.T.A. No.90/2011, such addition was sustained by the CIT(A).
8. Against these orders, appeals were filed before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal dismissed the appeals of the Revenue in M.A.I.T. No.27/2008, I.T.A. No.89/2011, however, in I.T.A. No.90/2011 the ITAT directed deletion of the addition and similar order was passed in all the three cases, which are under challenge in these appeals.
9. Learned counsel appearing for the appellant submitted that the Assessing Officer by recording reasons rightly directed for addition of the amount of share subscription provided by M/s Alliance Industries Limited, Sharjah in the income of the respondent. The Assessing Officer had given cogent reasons but in the appeal the said order was wrongly set aside by the Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal. It was submitted that once it was established by the Assessing Officer that the creditworthiness of the Company providing share subscription amount was doubtful, then the aforesaid finding could not have been reversed in appeals. It is also submitted that the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal have not considered the matter in its proper perspective. He has placed reliance on the following judgments of the different High Courts:-
(i) CIT v. Divine Leasing & Finance Ltd. [2008] 299 ITR 268/[2007] 158 Taxman 440;
(ii) Bhav Shakti Steel Mines (P.) Ltd. v. CIT [2010] 320 ITR 619/[2009] 179 Taxman 25 (Delhi);
(iii) Amines Plasticizers Ltd. v. CIT [1997] 223 ITR 173 (Gau.);
(iv) CIT v. G.M. Mittal Stainless Steel Ltd. [2004] 271 ITR 219/[2005] 142 Taxman 349 (MP); and
(v) CIT v. Ruby Traders & Exporters Ltd. [2003] 263 ITR 300/[2004] 134 Taxman 29 (Cal.).
It is submitted that these appeals may be allowed and the orders passed by the Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal may be set aside and that of the Assessing Officer may be restored.
10. Shri C.S. Agrawal, learned Senior Advocate appearing for the respondent supported the order passed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal and submitted that the controversy has been settled by the Apex Court in the CIT v. Lovely Exports (P.) Ltd. [Application No. 11993 of 2007, dated 11-1-2008] in which the Apex Court considering the question that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to AO, then 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. It is further submitted that in the present case, the identity of the Company which had provided share subscription was not in dispute but the Assessing Officer had doubted the creditworthiness of the said Company and only on this ground, without disputing the identity of the said Company, had directed addition against the respondent, which in the light of the judgment of Apex Court in Lovely Exports (supra) is not sustainable. It is also submitted that the similar question has been decided by the other High Courts relying on the judgment of Apex Court in Lovely Exports.
11. In this case, before proceeding further it would be appropriate if the findings recorded by the Assessing Officer are looked into, which are identical in all the matters. The Assessing Officer held thus:-
"On going through the above details furnished by the assessee, it is clear that although they indicate the identity of the NRI Company and the mode of transfer of money to the assessee but evidently lack in proving creditworthiness of the NRI Company. The transactions shown by the assessee through the banking channels ipso facto do not establish the financial capacity of the NRI Company. Further, it cannot be said that a transaction, which takes place by way of cheque, is invariably sacrosanct. Furthermore, the permission received from the RBI by the assessee also does not prove the financial capacity of the assessee. Despite repeated and sufficient opportunities allowed to the assessee as mentioned supra, it has not proved the financial capacity of the aforesaid NRI Company with regard to the above investment of Rs.21,27,50,403/- in share capital/premium during the year. As such, the above investment of Rs.21,27,50,403/-remained to be proved and established as from a genuine source. Under the facts and in the circumstances of the assessee's case, provisions of section 68 of the I.T. Act, 1961 are found clearly attracted and the ratio of the decision in the case of CIT Vs. Ruby Traders and Exporters Ltd. [2003] 263 ITR 300 (Cal) is found applicable."
6. Considering the totality of facts of the case of the assessee and relying on the above case laws, it is found that the genuineness of claimed investment of Rs.21,27,50,403/- towards share capital/premium, from M/s Alliance Industries 13Ltd., Sharjah, UAE, an NRI Company, in the assessee-company during the year has not been proved as the financial capacity of the above NRI Company was not proved/established by the assessee during the course of assessment proceedings despite due opportunity allowed to it. The alleged investment of Rs.21,27,50,403/- is, therefore, treated as unexplained credit u/s 68 of the I.T. Act, 1961 and added in computation of the total income of the assessee for A.Y. 2003-04. The aforesaid unexplained credit of Rs.21,27,50,403/- is treated as income from undisclosed sources and accordingly it is not entitled to set off of brought forward business loss/depreciation of earlier years. Penalty proceedings u/s 271(1)(c) for concealing the particulars of income/furnishing inaccurate particulars of income are initiated separately in this regard.
12. The aforesaid findings were reversed by the Commissioner of Income Tax (Appeals) by the appellate order, by which the Commissioner of Income Tax (Appeals) held in para 5 thus:-
"5. I have very carefully considered the detailed submissions of the Ld. counsel as discussed above that Assessing Officer was not justified in making addition of Rs.21,27,50,403/- on the ground that financial capacity of the NRI company was not proved/established by the appellant for making the investment. I have also very carefully perused the reasons given by the Assessing Officer for justifying his action for making addition of Rs.21,27,50,403/- u/s 68 of the Income-tax Act, 1961. I have also given due considerations to the report of the Assessing Officer as submitted by him on fresh evidence placed before me during the course of appellant proceedings by the Ld. counsel for the appellant. After due consideration of the matter, I hold that Assessing Officer was not justified in making an addition of Rs.21,27,50,403/- u/s 68 of the Income-tax Act, 1961 because appellant had fully discharged the burden cast upon it u/s 68 for explaining the deposit/investment receipt from M/s Alliance Industries Limited. I find that M/s Alliance Industries Limited is a NRI company having its Registered Office at Gibraltar and Management Head Office at Sharjah, UAE and this fact is not disputed by the Assessing Officer. Therefore, identity of the foreign investor is established beyond any doubt.
From the above, it is very much clear that amounts aggregating to Rs.21,27,50,403/- have flowed to the appellant from the current account number 02570196101 of M/s Alliance Industries Limited at Sharjah through proper banking channel and it is the money of M/s Alliance Industries Limited that has come to the appellant and M/s Alliance Industries Limited had the capacity to invest this much of amount with the appellant during the F.Y. 2002-2003. Thus, creditworthiness of M/s Alliance Industries Limited, also stands established. Since all the ingredients as are required to be satisfied for accepting the deposit as genuine u/s 68 are fulfilled in respect of this investment of Rs.21,27,50,403/- by M/s Alliance Industries Limited, with the appellant company, in my considered view Assessing Officer was not justified in drawing adverse inference in respect of this amount under reference. Moreover, Assessing Officer had not brought on record any evidence. Otherwise that is to say that Assessing Officer had not established by making inquiry that it was appellant's own money which it had received in the shape of Dollars from the NRI company. Assessing Officer himself has accepted the identity of the share applicant company and also genuineness of transactions in respect of this deposit. I find that Assessing Officer himself had accepted the similar deposits in the earlier A.Yrs. 2001-2002 and 2002-2003 as genuine. In fact assessment order relating to A.Y. 2001-2002 was passed after enquiry u/s 143(3) wherein similar investment from the same NRI company to the tune of Rs.4,64,71,322/- was accepted as genuine and investment of Rs.9,47,81,895/- from the same company was also accepted u/s 143(1) for the A.Y. 2002-2003. Since there is no deviation in the facts of the investment this year vis-a-vis investments made by the same company with the appellant in earlier years as mentioned above, I do not find any justification for not accepting the deposit this year as genuine. Assessing Officer had not given any reason worthwhile for taking different view this year in respect of similar deposit as he had taken while accepting such deposits as genuine in the earlier assessment years. But he had taken the deposit this year as not genuine. I place reliance on the decision of Hon'ble High Court in case of Godavari Corporation Limited reported at 156 ITR 835 wherein the Hon'ble M.P. High Court held that "similar cash credit having been accepted as genuine in the earlier year, the same explanation ought to have been accepted in the subsequent year". I also place reliance on the decisions of Hon'ble Bombay High Court in case of H.A. Saha & company vs. CIT reported at 30 ITR 618 and also on the observation of Hon'ble Calcutta High Court in case of CIT Vs. Hindustan Motors reported at 92 ITR 619 on this issue."
13. By recording aforesaid findings, the Commissioner of Income Tax (Appeals) reversed the order of the Assessing Officer and directed deletion of additions made in the matter. The ITAT affirmed the order of CIT(A) with similar reasoning.
14. In the light of the aforesaid factual position, the legal position may be looked into because the aforesaid factual position has not been disputed by the parties.
15. In Lovely Exports (P.) Ltd.'s case (supra) the Apex Court considering the question held thus:-
"2. Can the amount of share money be regarded as undisclosed income under s. 68 of IT 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 AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment."
16. The aforesaid judgment has been followed by all the Courts and the judgments relied on by the appellants relates to the period prior to the judgment in Lovely Exports (P.) Ltd.'s case (supra). As the Apex Court has specifically held that if the identity of the person providing share application money is established then the burden was not on the assessee to prove the creditworthiness of the said person. However, the department can proceed against the said Company in accordance with law. The position of the present case is identical. It is not the case of any of the parties that M/s Alliance Industries Limited, Sharjah is a bogus company or a non-existent company and the amount which was subscribed by the said Company by way of share subscription was in fact the money of the respondent assessee. In the present case, the assessee had established the identity of investor who had provided the share subscription and it was established that the transaction was genuine though as per contention of the respondent the creditworthiness of the creditor was also established. In the present case, in the light of the judgment of Lovely Exports (P.) Ltd.'s (supra) we have to see only in respect of the establishment of the identity of the investor. The Delhi High Court also in Divine Leasing & Finance Ltd.'s case (supra), considering the similar question held that the assessee Company having received subscriptions to the public/rights issue through banking channels and furnished complete details of the shareholders, no addition could be made under section 68 in the absence of any positive material or evidence to indicate that the shareholders were benamidars or fictitious persons or that any part of the share capital represented company's own income from undisclosed sources. The similar view has been taken by the other High Courts.
17. As the Apex Court has considered the law in Lovely Exports (P.) Ltd.'s case (supra) and in view of law laid down by the Apex Court, we find that the substantial questions framed in these appeals do not arise for our consideration. Accordingly, all these appeals are dismissed with no order as to costs.

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