Defunct companies at the time of assessment have resurrected back to life after statutory compliances were fulfilled, addition u/s 68 sustained

Brief of the case:

In the case of ACIT Vs. Prem Castings Pvt. Ltd. ITAT, Delhi Bench reversed the order of CIT (A) who deleted addition of Rs. 3,46,00,000/- after relying upon the decision of Hon’ble SC in the case of Lovely Exports (216 CTR 195) in which it was held that once the assessee has produced documents regarding identity, genuineness and creditworthiness of the share applicants, the onus of proving share application as bogus shifts on the revenue and department is free of open the assessment of share applicant but cannot made addition in the hands of the assessee. Tribunal also explained burden of proof rests upon the party, whether plaintiff or defendant, who substantially asserts the affirmative of the issue. It is fixed at the beginning of the trial and remains unchanged and, in this respect, reference may be made to section 101 of the Indian Evidence Act .

Facts of the case:

• The assessee is a private limited company deriving income from manufacture and sale of iron and steel products. The return of income was filed on 31.10.2007 declaring NIL income.
• However, the company had paid taxes as per provisions of Section 115JB of the Income-tax Act, on book profit shown at Rs.21,77,195/-.
• In response to notice u/s 142 (1) assessee filed the reply by stating that the assessee company had subscribed share capital of Rs.3,92.00,000/- during the A.Y. 2007-08 out of which Rs.46,00,000/- were received as share application in earlier year and produced the list of persons to whom the share capital was allotted along with amount of share application money and date of transaction.
• AO has taken note of the fact that the assessee had been delaying filing of reply to the queries for details of share capital and answer was given only after a gap of three (3) months and nine (9) days knowing very well that the instant case was getting time barred.
• After going through the written submissions filed by the assessee in which the names of the alleged investors, their addresses, PAN, date of transactions involving share application money and amount of share application money in each case, the Assessing Officer made the investigation initially within the limited time i.e. 31 working days.
• After going through the results of investigations on the above mentioned lines, the Assessing Officer observed that the same are against the genuineness of share application money transactions and created very serious doubts about the identity and creditworthiness of the share application money.
• The AO taking into consideration the report of ITO, unserved notices, hand writing expert opinion and the bank report which stated that the share applicants/holders did not had any bank account in their branches, concluded that the assessee company failed to comply with the requirements of the notices issued u/s 142(1) and also took note of the fact that assessee failed to produce a single investor to prove the identity, credit worthiness and genuineness of the transactions of the claimed investors, made thus an addition of Rs.3,46,00,000/- u/s 68 of the Act.

Contention of the revenue:

Many investigations were made due to doubtful behaviour of assessee and response to notices and following facts were elaborated:

• As per handwriting expert signature on affidavit and ITRs of the share applicants were different.
• Assessee did not produce share applicants in response to notice but only filed photocopies of affidavit.
• Investigation with few banks showed that the veracity of the bank statement was turned into bogus.
• Inspector who had gone to serve the notices u/s 133(6) reported back to the AO that the addresses were not correct, and nobody by the names given were found to be ever residing or functioning at the said addresses.
• Out of these 9 investors, there was common address for two concerns and the Inspector was able to locate the director of these companies who stated that both these companies have stopped functioning
• The handwriting expert was of the opinion that out of the 32 sets of signature, 20 sets were not matching and two were forged signatures.
• The assessee was issued a showcause notice stating that the results of the investigation created serious doubts about the identity, creditworthiness of its claimed investors and genuineness of the transactions of share application money and it was directed to produce the investors; and in addition to that the assessee was also directed to produce the original affidavits of the investors also.
• The assessee declined to produce the alleged investors and the reason given by the assessee for not producing the investors was that since the assessee company is running on loss, it is not in a position to give any dividend to them; and so the investors will not cooperate with the assessee at this stage, which is very doubtful.
• Out of the 18 transactions involving 9 of the investors were sought by the AO from the respective branches of the bank who reported to AO that there were no such bank accounts of the said persons/ investors.
• After making extensive investigation within the limited period left with him, the AO had rightly made the addition.

Contention of the assessee:

• Certain friends and business associates have invested to the tune of Rs.3.46 crores in the assessee company and they have been duly allotted shares along with share certificates.
• There were 37 investors in the financial year out of which 23 investors are corporate companies duly registered with the Registrar of Companies, Ministry of Corporate affairs, Govt. of India; and remaining are the individual persons.
• The amount of Rs.3.46 crores was the fresh share capital received by the assessee company during the relevant year.
• This share capital of Rs.3.46 crores was received by the assessee company through account payee cheques during the relevant year and the entire amount of share capital has been duly allotted during the relevant year itself, for which necessary statutory declaration in Form No.2 has already been filed before the ROC much before the assessment proceedings started.
• All of them were the investors and not the share applicants; and their enforcement for appearance before the AO was not in the hand of the company, whereas the AO was requested to call them by using his powers as per law.
• AO has accepted as in his letter that he has issued letters u/s 133(6) to 15 share applicants but out of which 9 persons has been served and out of which 6 has already complied with the requirement of law before the AO.
• AO has straightway formed an adverse opinion against the assessee after going through the Inspector’s report without appreciating the fact that Inspector had gone from Muzaffarnagar to Delhi on 08.12.2009 and on the same date, he has given his report; and he pointed out that the travelling distance between the Muzaffarnagar to Delhi will take around at least 6 hours journey due to various reasons like traffic jam, congested road and wondered as to how the Inspector could have covered the said distance and went to each addresses at Delhi on the same day.
• the adverse report of 3 banks which are also not acceptable because first of all the AO has not found any fault in the bank account of the others and admittedly there is no dispute by accepting the entire inclusive of above Rs.51 lacs that the amount has been credited cheque/DD/PO so his reliance solely on the bank letter which, according to him, is third party information and cannot be given any weightage.
• Once the AO has all the details of PAN of the companies/ individuals, he could also cross verify from their jurisdictional AO’s record all these details but nothing has been done by him.
• CIT (A) has given his finding of the shareholding companies based on PAN, Financial Statements, ITR etc. after a thorough examination of details of the PAN, Voter Id card towards the genuineness examined the share application form, affidavit and bank account for creditworthiness.
• According to him, once these documents are on the record the burden shifts upon the AO and the CIT(A) has passed an order / direction wherein enquiry has been ordered against the investors.
• Assessee relied upon Hon’ble Delhi HC in the case of Diamond Products (21 DTR 206 (2009)) wherein it has been held that examining of source of source is not required for section 68.

Held by the CIT (A):

• The CIT (A), while passing the impugned order, took note of the fact that the AO made the assessment on the basis of his investigations on the following three lines:-

i. Enquiries conducted through the I.T.I. of the office;

ii. Assignment given to handwriting expert for verification of signatures on the documents furnished by the assessee; and

iii. Checking of PANs of share applicants on Assessee Information System.

• After discussed the above observation in detail CIT (A) held the appellant company has discharged its onus cast upon it by the statute.
• The appellant has amply proved and discharged its burden by filing the necessary relevant documentary evidences in support of share capital introduced.
• Even if there is any doubt on the source of fund; the same be based on inquiry in the hands of the share applicants. Thus the jurisdictional AOs of the share applicants are given specific directions u/s 150 read with section 153 of the Act to reopen their assessments for the relevant time period. The AO is directed to inform the jurisdictional AOs of the aforesaid depositors.
• CIT (A) followed the observation made by the Hon’ble Supreme Court in the decision CIT vs. Lovely Exports (P) Ltd. (Supra).

Held by ITAT:

• As per section 101 of Evidence Act when a person is bound to prove the existence of a fact, the burden of proving it lies on that person.
• Assessee cannot discharge its burden of proof merely proving the identity of the share applicant/shareholder, he has to prove all about the transaction, namely, identity, capacity of the shareholder to invest money and genuineness of the transaction.
• Onus probandi (onus of proof) is concerned with the weight of evidence on each side and pertains to the region of production of evidence. In the case of Sumati Dayal vs. CIT, 214 ITR 801 (SC), the Hon’ble Apex Court has held that, “It is not doubt true that in all cases in which a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proof that it is not taxable because it falls within the exemption provided by the Act lies upon the assessee.
• Though it may be kept in mind that the initial burden is on the assessee to prove the genuineness of the transaction, but when the assessee furnished the details of the shareholders, addresses, etc., this burden is to be taken as discharged, and then the onus will get shifted to the department.
• But once the materials are scrutinized and it is found by the AO that documents furnished cast serious doubt about the veracity of the same, then the materials of the scrutiny are to be communicated to the assessee, thereafter the onus shifts from the revenue to the assessee. Then, the assessee has to take appropriate steps for proving his case.
• AO found from searching the database of Assessee Information System (AIS) that either the addresses given by the assessee were different or the PANs were invalid.
• AO had investigated the matter fairly and had given enough opportunities to the assessee to come clean with the identity, creditworthiness and genuineness of the transaction.
• AO had given sufficient notice and furnished the enquiry reports to the assessee at various stages to show that he was not satisfied with the documents filed by the assessee before the AO.
• AO has disproved the evidences brought by the assessee to discharge its burden of proof, which show that the assessee failed to discharge its burden of proof in respect to share application money which has come into its account.
• CIT (A) erred in taking the audited balance sheet of subsequent assessment year and documents to prove the creditworthiness which was filed before him to prove the existence of the said companies and individuals.
• Defunct companies at the time of assessment, as pointed out by the AO, have resurrected back to life after statutory compliances were fulfilled; and the said documents were furnished before the CIT (A) who has erred in relying upon it to delete the addition.
• It is difficult to allow such a prayer of the assessee for the simple reason that the AO had demolished the case of the assessee to prove the identity, creditworthiness and genuineness of the alleged shareholders.