Whether when assessee has filed returns of subscriber companies and also bank statements and balance sheets in addition to confirmation letters from them, assessee can be considered to have discharged burden of proof

THE issues before the Bench are - Whether mere furnishing of the bank statements of the share subscribers without any explanation for the deposits in the accounts can meet the requirements of Section 68; Whether to establish the creditworthiness of the investors, is it necessary to know the business activities of the share-subscribers and also the repaying capacity, in case the amount has been borrowed for making the investment; Whether when the assessee has filed the income-tax returns of the subscriber companies as also their bank statements and balance
sheets in addition to the confirmation letters from the said two companies, the assessee can be considered to have discharged the burden of proof and Whether once the assessee has established its case, the AO cannot shift the burden back onto the assessee without the AO producing any tangible material to doubt the veracity of the documents furnished by the assessee. And the verdict goes in favour of assessee.

Facts of the case

The assessee had received unsecured loans from its former directors Mr. Aloke Aggarwal and from Smt. Sadhna Aggarwal. The assessee had also received share application money as investment in the company. As per the AO, the source of these loans and investments were not properly explained and thus, they were added to the income of the assessee u/s 68 as unexplained investments. On appeal the CIT(A) directed the AO to submit a remand report on this matter to verify the genuineness of the receipt of loans. In the remand report it was submitted that the Mr. Alok Aggarwal had disclosed capital gains, proceeds from sale of land, which established the presence of sufficient funds for granting the loan. The CIT(A) was convinced that Mr. Alok Aggarwal had ample availability of funds and deleted the addition made by the AO.

However, regarding the loan received from Smt. Sadhna Aggarwal, the remand report could not disclose any capital gains or availability of funds with her during the years in question, and therefore, the CIT(A) retained the addition on this account as unexplained investment. Since the remand report revealed that the loan was received from Mr. Alok Aggarwal in cash, the AO was direct to initiate penalty proceedings u/s 271D and 271E for violation of sections 269SS and 269TT.

Regarding the share application money, the assessee had submitted the income-tax returns of the subscriber companies as also their bank statements and balance sheets in addition to the confirmation letters from the said two companies. Therefore, the CIT(A) deleted the addition on this account by holding that the assessee had discharged its burden to establish the identify and creditworthiness of the share applicants as also the genuineness of the transactions.

Aggrieved, the Revenue filed an appeal before the Tribunal. The Tribunal concurred with the views of the CIT(A).

Still aggrieved, the Revenue has filed this present appeal before the High Court.

With regard to the addition made on account of share application money allegedly received by the assessee from two companies, the Departmental Representative submitted that merely furnishing the income-tax returns and bank statements etc. of the share applicants would not be sufficient. It was further necessary for the assessee to have discharged the burden of proving the creditworthiness of the share applicants by producing the share applicants and by other evidence to the satisfaction of the AO and for this purpose reliance was placed on the decision of this court in the case of CIT Vs. Nipun Builders and Developers Pvt. Ltd.

Having heard the parties, the High Court held that,

++ the Income Tax Appellate Tribunal examined the order passed by the Commissioner of Income-tax (Appeals) and concurred with the views taken by him. We also find no reason to take a different view. In any event, no substantial question of law arises for our consideration in so far as the addition, on account of unexplained investment is concerned;

++ the quoted observations will clearly explain the context and setting in which they were made. They cannot, therefore, be understood as placing an embargo on the power of the AO to ask the assessee to prove the creditworthiness of the creditor/share holder for the purpose of Section 68. In an appropriate case, if the facts and circumstances justify, it would be open to the AO to seek information from the assessee as to the creditworthiness of the creditor/share subscriber which may include information as to the sources of the creditor/share subscriber. If proving the creditworthiness of the creditor/subscriber is now judicially accepted as one of the ingredients of the onus cast on the assessee under Section 68, we do not see how proof of the resources of the creditor/share subscriber can be completely excluded from the sweep of the burden. It may not be required of the assessee to give in-depth particulars and details about the resources of the creditor or the share subscriber, but the minimum required of him would be, in our opinion, information that will prima face satisfy the AO about the creditworthiness. Mere furnishing of the bank statements of the share subscribers without any explanation for the deposits in the accounts may not meet the requirements of Section 68. It may be necessary to know the business activities of the share-subscribers in order to ascertain whether they are financially sound and are able to purchase shares for substantial amounts; if they have borrowed monies for making the investment, whether they were capable of repaying them having regard to the nature of their business, volume of the business, etc. These are very relevant, in our opinion, to establish the creditworthiness of the investors. It is for this purpose that it is necessary for the assessee, in appropriate cases where the facts and surrounding circumstances justify, to seek the assistance of the principal officer of the subscribing companies and present him before the AO so that he will be in a position to explain in detail the source from which the shares were subscribed. A curious aspect of the matter which cannot be lost sight of is that the record reveals the assessee’s ability to procure the share applicant’s bank statement. This speaks volume about its conduct, and belies the argument about its inability to ensure the presence of such company’s principal officers.";

++ from a reading of the above extract, it is apparent that the case of Nipun Builders and Developers Pvt. Ltd. was different and is distinguishable from the present case. In that case, the summons sent by the Assessing Officer to the Companies who had applied for shares had been returned with the remarks “no such company”. Whereas in the present case, the identity of the two companies which are sister companies stood established. Furthermore, this is not a case of mere furnishing of copies of bank accounts of the subscribers. But, in the present case, as noted by the Commissioner of Income-tax (Appeals) the assessee had filed the income-tax returns of the subscriber companies as also their bank statements and balance sheets in addition to the confirmation letters from the said two companies. A copy of the Form No. 2 filed by the assessee with the Registrar of Companies regarding the allotment of shares to the said two companies had also been furnished. It is in this backdrop that the Commissioner of Income-tax (Appeals) had concluded that the assessee had been able to prove its case and that the Assessing Officer could not shift the burden back onto the Assessee Company without the Assessing Officer producing any tangible material to doubt the veracity of the documents furnished by the assessee. The Income Tax Appellate Tribunal concurred with the views taken by the Commissioner of Income-tax (Appeals).