THE issues before the Bench are - Whether it is the duty of
Revenue to adduce evidence to show from what source, income is derived; Whether
submission of PAN is a sufficient compliance of proving genuineness of an
assessee; Whether the doctrine of "source of source" and "origin of origin" can
be applied universally and Whether creditworthiness of an assessee can be proved
by mere issue of a cheque or by furnishing a copy of statement of bank account.
And the verdict goes in favour of Revenue.
Facts of the
case
Assessee, a
private limited company, had filed ROI for AY 2002-03 and 2003-04 declaring
income of Rs.11,566/- and 18,720/-, which were processed u/s 143(1).
Subsequently, reassessment proceedings were initiated on the basis of
information received from the Investigation Wing that the assessee was one of
the beneficiaries, who had procured share application money from entry
providers. Notices for reassessment were received back unserved and subsequently
were served by affixture at the address given in the returns. The assessee,
however, did not appear in response to the said notices. Thus, the AO issued a
show cause notice u/s 144, which was also returned unserved with the remark “no
such firm”. Assessee again was served through affixture. On examining the return
for the AY 2004-05, office of Chartered Accountant of assessee was contacted and
thereupon they filed their POA. The said CAs also filed a letter that the
assessee company had not received any notice and had been regularly filing their
returns mentioning the correct address and after that there was change in
address, the same was informed. Along with this letter, no detail of new address
was filed. Another show cause notice was issued and sent at the last known
address of assessee and the address of the CAs fixing the hearing. The letter
referred to the notice u/s 147/148, show cause notice u/s 144 and the fact that
the reasons could be provided only after ROI was filed but yet in the interest
of justice and for the purpose of proceedings it was stated that as per
information available, the share capital was received during the years from the
persons who had been identified as entry operators. Thus, assessee had received
accommodation entries covered u/s 68 as unexplained cash credit. This time also,
no one appeared at the time of hearing. Subsequently, a request for adjournment
was received by way of courier from CAs and they were allowed time, but on the
said date also, no one appeared and no written request was received.
Accordingly, ex-parte assessment orders were passed for the two AYs.
On
appeal before CIT(A), assessee substantially succeeded on merits but did not
succeed in their challenge to reopening u/s 147/148 or on the question of
service of notice. Two cross appeals were preferred before the tribunal for the
two AYs but the same had been dismissed, on the basis that assessee had
furnished PAN of the share applicants except with regard to the share capital of
Rs.4,50,000/- and before CIT(A), assessee had also submitted various details and
documents to establish identity of the investors/share applicants. Thereafter,
it was recorded that the tribunal had gone through various reasons and
principles on which CIT(A) had deleted the addition. CIT(A) had given a finding
that verification of PAN was made and found to be correct except with regard to
the share application money of Rs.4,50,000/- and, therefore, in the light of the
judgments of Delhi HC in CIT v. Lovely Exports Private Ltd. [2008] 299 ITR 268,
Winstral Petrochemicals Pvt. Ltd. (2010-TIOL-353-HC-DEL-IT) and CIT Vs.
Dwarkadhish Investment (P) Ltd. (2010-TIOL-617-HC-DEL-IT) and
other cases, addition was not justified and not in accordance with law. Cross
objections filed by the assessee were not pressed and it was specifically
recorded that the validity of notice u/s 148 was not argued by assessee and it
was fairly accepted that the assessee's appeals had no merit. The tribunal
thereafter held that they had gone through the order of CIT(A) and the findings
recorded on the said issue were right. Other findings recorded by CIT(A)
refers to the remand report which was called from AO stating that notice u/s 148
was sent at the last known address which was also mentioned in the ROI, but was
received unserved with the remark “no such assessee”, but subsequently served
through affixture at the address which was shown in the ROI for the AY 2004-05.
The AO in the remand report had mentioned that the assessee's registered office
was located at Mathura Road, New Delhi on the date of affixture of notice.
Subsequently, they shifted their registered office. Assessee had also stated
that they had “misplaced” the intimation filed with the department on change of
address. The CIT (A) had recorded a finding that assessee had wrongly claimed
that they had informed the department about change of their registered office
address, as not even a single intimation was presented before the AO or
him.
On
the other hand, the Revenue's counsel had contended that it was the obligation
and responsibility of the assessee to intimate change of address to the AO as no
return with the new address was furnished or even filed. Their conduct in not
responding and appearing before AO was adversely commented upon by the CIT(A)
and the said finding had not been disturbed by the tribunal. AO is both an
investigator and an adjudicator. Normally a factual assertion made should be
accepted by AO unless for justification and reasons the AO feels that he
needs/requires a deeper and detailed verification of the facts alleged. The
assessee in such circumstances should cooperate and furnish papers, details and
particulars. This may entail issue of notices to third parties to furnish and
supply information or confirm facts or even attend as witnesses. AO can also
refer to incriminating material or evidence available with him and call upon the
assessee to file their response. We cannot lay down or state a general or
universal procedure or method which should be adopted by the AO when
verification of facts was required. The manner and mode of conducting assessment
proceedings had to be left to the discretion of the AO, and the same should be
just, fair and should not cause any harassment to the assessee or third persons
from whom confirmation or verification was required. The verification and
investigation should be done with the least amount of intrusion, inconvenience
or harassment especially to third parties, who may have entered into
transactions with the assessee. Certain facts or aspects may be neutral and
should be noted. These should not be ignored but they cannot become the bedrock
or substratum of the conclusion. The provisions of Evidence Act were not
applicable, but the AO being a quasi judicial authority, must take care and
caution to ensure that the decision was reasonable and satisfies the canons of
equity, fairness and justice. The evidence should be impartially and objectively
analyzed to ensure that the adverse findings against the assessee when recorded
were adequately and duly supported by material and evidence and can withstand
the challenge in appellate proceedings. Principle of preponderance of
probabilities applies. The reasoning and the grounds given in any decision or
pronouncement while dealing with the contentions and issues should reflect
application of mind on the relevant aspects. 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 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. 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. 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 normal in case of investment, was
entirely 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.
Held
that,
++
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 was not in the statute. In A. Govindarajulu
Mudaliar v. CIT [1958] 34 ITR 807, SC 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;
++ we are conscious of the doctrine of
'source of source' or 'origin of origin' and also possible difficulty which an
assessee may be faced with when asked to establish unimpeachable
creditworthiness 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 “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 ill gotten 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;
++ in
Lovely Exports, 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. (2003-TIOL-277-HC-DEL-IT). The
decision in Steller Investment’s case was affirmed by the SC but, by observing
that the conclusion was on the facts and no interference was called for. Lovely
Exports was a case of public limited company where shares were subscribed by
public and it was accordingly observed that the 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. Thereafter reference was made to Full Bench
decision in the case of Sophia Finance Ltd.’s case wherein it has been observed
that if the shareholders exists then, “possibly”, no further enquiry needs to be
made and that the Full Bench had not reflected upon the question of whether the
burden of proof 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. In Nova
Promoters & Finlease, it was held that in view of the link between the entry
providers and incriminating evidence, mere filing of PAN number, acknowledgement
of income tax returns of the entry provider, bank account statements etc. was
not sufficient to discharge the onus;
++ in
CIT v. Nipun Builders and Developers (2013-TIOL-32-HC-DEL-IT), this
principle has been reiterated holding that the assessee and the Assessing
Officer have to adopt a reasonable approach and when the initial onus on the
assessee would stand discharged depends upon facts and circumstances of each
case. In case of private limited companies, generally persons known to directors
or shareholders, directly or indirectly, buy or subscribe to shares. Upon
receipt of money, the share subscribers do not lose touch and become
incommunicado. Call monies, dividends, warrants etc. have to be sent and the
relationship is/was a continuing one. In such cases, therefore, the assessee
cannot simply furnish details and remain quiet even when summons issued to
shareholders under Section 131 return unserved and uncomplied. This approach
would be unreasonable as a general proposition as the assessee cannot plead that
they had received money, but could do nothing more and it was for the assessing
officer to enforce share holders attendance. Some cases might require or justify
visit by the Inspector to ascertain whether the shareholders/subscribers were
functioning or available at the addresses, but it would be incorrect to state
that the assessing officer should get the addresses from Registrar of Companies'
website or search for the addresses of shareholders and communicate with them.
Similarly, creditworthiness was not proved by mere issue of a cheque or by
furnishing a copy of statement of bank account. Circumstances might require that
there should be some evidence of positive nature to show that the said
subscribers had made a genuine investment, acted as angel investors, after due
diligence or for personal reasons. Thus, finding or a conclusion must be
practicable, pragmatic and might in a given case take into account that the
assessee might find it difficult to unimpeachably establish creditworthiness of
the shareholder;
++
what we perceive and regard as correct position of law is that the court or
tribunal should be convinced about the identity, creditworthiness and
genuineness of the transaction. The onus to prove the three factum is on the
assessee as the facts are within the assessee's knowledge. Mere production of
incorporation details, PAN Nos. or the fact that third persons or company had
filed income tax details in case of a private limited company may not be
sufficient when surrounding and attending facts predicate a cover up. These
facts indicate and reflect proper paper work or documentation but genuineness,
creditworthiness, identity are deeper and obtrusive. Companies no doubt are
artificial or juristic persons but they are soulless and are dependent upon the
individuals behind them who run and manage the said companies. It is the persons
behind the company who take the decisions, controls and manage them. The
respondent herein is a Private Limited Company. It is not the case of the
respondent that the Directors or persons behind the companies making the
investment in their shares were related or known to them. It is highly
implausible that an unknown person had made substantial investment in a private
limited company to the tune of Rs.63,80,100/- and Rs.75,60,200/- in two
consecutive assessment years 2002-03 and 2003-04 respectively without adequately
protecting the investment and ensuring appropriate returns. Other than the share
application forms, no other agreement between the respondent and third companies
had been placed on record. The persons behind these companies were not produced
by the respondent. On the other hand respondent adopted prevaricate and non-
cooperation attitude before AO once they came to know about the directed enquiry
and the investigation being made. Evasive and transient approach before AO is
limpid and perspicuous. Identity, creditworthiness or genuineness of the
transaction is not established by merely showing that the transaction was
through banking channels or by account payee instrument. It may, as in the
present case required entail a deeper scrutiny. It would be incorrect to state
that the onus to prove the genuineness of the transaction and creditworthiness
of the creditor stands discharged in all cases if payment is made through
banking channels. Whether or not onus is discharged depends upon facts of each
case. It depends on whether the two parties are related or known to each; the
manner or mode by which the parties approached each other, whether the
transaction was entered into through written documentation to protect the
investment, whether the investor professes and was an angel investor, the
quantum of money, creditworthiness of the recipient, the object and purpose for
which payment/investment was made etc. These facts are basically and primarily
in knowledge of the assessee and it is difficult for revenue to prove and
establish the negative. Certificate of incorporation of company, payment by
banking channel, etc. cannot in all cases tantamount to satisfactory discharge
of onus. The facts of the present case noticed above speak and are obvious. What
is unmistakably visible and apparent, cannot be spurred by formal but unreliable
pale evidence ignoring the patent and what is plain and writ large. In view of
the aforesaid discussion the substantial question of law framed in the two
appeals is answered in favour of Revenue and against the assessee. The appeal is
accordingly allowed to the extent indicated above. The Appellant is also
entitled to costs which is assessed at Rs.20,000/.
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