When we refer to an entry of loan transaction as `fake loan' received
from a `paper company', it invariably means that such entry represents
unaccounted money of the person in whose books of account the money has
been credited as loan and the lender company is only a conduit for
routing the money back to the books of account of that person. However,
despite having knowledge of this fact and knowing the techniques and
methods used by the assessees for this purpose, it remains a huge
challenge for the tax authorities to bring all material facts and
evidences on record so as to prove which in his opinion is a fact beyond
doubt.
2. In an economy where unaccounted income is a big menace, there are
always efforts made by the tax evaders to bring their unaccounted income
back to their books of account without paying any tax on the same.
Numerous methods and techniques are used for this purpose and there are
lots of techniques that authorities know about and probably countless
others that have yet to be uncovered. Routing the unaccounted income
back to the books of account disguised as loan or share capital is one
of such methods widely used by the tax evaders in our country. The
method is most prevalent and perhaps also one of the most organized one
to bring the unaccounted money back to the books of account and even the
established business houses resort to this method to bring their
unaccounted money back to their business without paying any tax on the
same.
The process to bring the money back in this manner is commonly known in
business parlance as Jamakharchi entries or accommodation entries. This
is a well organized racket controlled and conducted by persons known as
entry providers. Kolkata is undoubtedly the Mecca of such operations
liberally providing entries to business concerns all over the country
but other business hubs such as Mumbai and Delhi are also not far behind
in having organized rackets for providing accommodation entries to the
willing tax evaders. Although, there is no uniformity of methodology or
approach, or certainty of estimation of unaccounted income being brought
back in the books of accounts in this manner, the magnitude of the
same, without any doubt, is significant and huge.
2.1 The method of providing accommodation entry entails breaking up
large amounts of money into smaller, less-suspicious amounts. In India,
this smaller amount has to be below Rs. 50,000/- as deposit of cash
below this amount does not require providing PAN of the depositors. The
money is then deposited into one or more bank accounts either by
multiple people or by a single person over an extended period of time.
Also, even larger amounts are deposited in the banks with PAN numbers of
individuals who are mostly illiterate and work for these entry
operators for small salary or commission. The money is then routed
through paper companies controlled by these operators. These companies
are incorporated by taking care of all formalities such as registering
with ROC but having only postal addresses with no real office or
employees. The directors of such companies are again individuals who are
mostly illiterate or semiliterate and work for the entry operators for
small salaries or commission. At first sight, most of these companies
would pass of as finance, investment or technology companies. But as the
entry operators would secretly admit, these are only paper companies
used to route the unaccounted income and, at the same time, clean hoards
of unaccounted income for their clients. These companies used for
routing the unaccounted money are basically fake companies that exist
for no other reason than to `layer' the entries or pass it on to the
beneficiary as loan or share capital. They take in unaccounted money as
"loan or share capital" and pass it on to either another such paper
company for `layering' of the transaction or directly to the beneficiary
as loan or share capital. They simply create the appearance of
legitimate transactions through fake entries of loans or share capital
in their books of account. As has been exposed from time to time through
search and seizure operations by the department, such entry operators
controls hundreds of bank accounts for depositing cash and hundreds of
companies for routing the entries. Limited resource and infrastructure
of the Registrar of Companies (ROC) perhaps makes it easier for them to
incorporate large number of such paper companies without any difficulty.
The process, prima facie, may appear very simple but it is extremely
difficult to expose the whole chain of money deposited and `layers'
through which it is routed back to the beneficiary. The biggest problem
is that there is no effective deterrence to curb the activities of these
entry operators. Even conducting search and seizure operations against
them have not really worked as a deterrence and such operations often
ended up in disclosure of `unaccounted commission income' of these entry
operators which definitely could not be the purpose of conducting
search and seizure operations against these operators.
2.2 In USA, in 1996, Harvard-educated economist Franklin Jurado went to
prison for cleaning $36 million for Colombian drug lord Jose
Santacruz-Londono. Even in India, people with a whole lot of unaccounted
income typically hire such `financial experts' to handle the process to
bring the money back to books of account without paying tax on the
same. It's complex by necessity. The whole idea is to make it impossible
for Income-tax authorities to trace the unaccounted money and it's
source during the process of bringing it back to the books of account of
the assessee. However, we do not have such provisions in Income-tax Act
1961 to put such operators behind bars. Hence, the solution at the
moment is to handle the individual cases of such entries routed back
through paper companies at the time of assessment in the purview of
available provisions of Income- tax Act and judicial pronouncements in
respect of the same.
3. Recourse under Section 68 of the Income-tax Act 1961:
The recourse available for the assessing officers to tackle the
individual cases of such fake loans brought back in the books of account
as cash credit is within the meaning of Section 68 of the Income-tax
Act 1961. The provision relating to cash credit, as in Section 68, was
provided for the first time in the Income Tax Act 1961 (Act No.43 of
1961) as there was no corresponding provision in the Income Tax Act,
1922. It would be pertinent to note that Section 68 is a new section in
comparisons with the provision of the Income Tax Act, 1922 and it is a
culmination of a series of judicial pronouncements under the provisions
of the Income Tax Act, 1922.
3.1 For the purpose of better comprehension, the Section 68 may be divided as below:
(1) Where any sum is found credited in the books of an assessee;
(2) Maintained for any previous year; and
(3) Assessee offers no explanation about the nature and source thereof; or
(4) The explanation offered by him, is not, in the opinion of the Assessing Officer, satisfactory;
(5) The sum so credited may be charged to Income tax;
(6) As the income of the assessee, of that previous year.
The initial catchphrase of the section is " Where any sum is found
credited in the books of account of the assessee" meaning thereby that
Section 68 is attracted where an entry relating to a sum is found to
have been credited in the books of the assessee, which thus implies,
existence of books and recording of a sum which the Assessing Officer
considers as doubtful. Perusal of Section 68 would show that in relation
to the expression `books', the emphasis is on the word `assessee'. In
other words, such books have to be the books of the assessee himself and
not of any other person and books of account of even a firm in which
the assessee is a partner cannot be considered as the books of the
assessee as held in the case of Smt. Shanta Devi v. CIT [1988] 171 ITR
532 (Punj. & Har.).
On this issue, it would also be pertinent to refer to another recent
decision by Hon. Indore Bench of ITAT in case of Agrawal Coal Corpn.
(P.) Ltd. v. Asstt. CIT 63 DTR 201. In this case it was held by the
Tribunal that merely because the companies were registered with ROC,
were filling return of income, having PANs/bank accounts, share
application forms were submitted but the same did not establish their
identity as these companies might have been existing on papers or in
real sense at the time of registration but were specifically found to be
non-existent. Further, assessee even failed to produce the director or
employees of these share applicants and, thus, addition under Section 68
made in the hands of assessee was sustainable.
In CIT vs. Frostair (P.) Ltd. [2012] 26 taxmann. com 11 (Delhi), it was
held that the assessee was under a burden to explain nature and source
of share application money received in a given case and he had to
establish shareholder's identity; genuineness of transaction; and
creditworthiness of shareholders. On being informed that assessee had
accepted share capital from some companies which were engaged in
providing bogus entries, in form of loan and share application money,
Assessing Officer asked for details under Section 142 of the Act.
Assessee submitted a list of 18 shareholders from which Assessing
Officer discerned that PAN/GIR No. of shareholders was not correct, they
were not available at addresses given and they were not filing their
ITRs with concerned officers. It was held by the Hon. High Court that
since Assessing Officer had examined all facts in exhaustive manner,
addition under Section 68 and, consequently initiation of penalty
proceedings were justified.
Another recent decision by Hon. Allahabad High Court dated July 30, 2012
in the case of CIT vs.Hindon Forge (P.) Ltd. [2012] 25 taxmann. com 239
(All.), may also be referred to on this issue. In this case the
Assessee-company had taken unsecured loans from eight different trusts.
One `R' was common managing trustee of all these trusts. He was also
managing director of assessee-company and other directors were his close
relatives. `R' did not produce trust deeds, its objects, and
beneficiaries of trusts to establish that there were beneficiaries other
than him and his associates. Trusts were receiving cash donations,
which were transferred on same day to assessee by way of cheques.
Assessee did not prove that trusts had any other sources of fund or that
they had given credits to any other person or company. In the given
facts it was held that the method and manner adopted by assessee clearly
established that he was playing a fraud with revenue and, since
genuineness of transactions were not established at all, there was no
question of shifting burden under Section 68 on revenue and, therefore,
addition of unsecured loans to income of assessee was justified. It is
important to note that the decision of Hon. Gujarat High Court in the
case of Dy. CIT v. Rohini Builders (supra) was also referred to in this
decision.
There is another recent and significant decision dated 15th February
2012 in the case of Commissioner of Income-tax vs. Nova Promoters &
Finlease (P) Ltd. [2012] 18
taxmann.com
217 (Delhi) which is of immense relevance, as in this case important
observations have been made by the Hon. Delhi High Court as to the
burden of proof and shifting of onus in the cases of cash credit under
Section 68 of the Act. In this case, the assessee filed its return
declaring loss for relevant assessment year which is Assessment Year
2000-01. Subsequently, Assessing Officer received information from the
Investigation Wing that assessee had obtained accommodation entries in
garb of share application monies. In order to examine genuineness and
creditworthiness of companies which gave entries to the assessee,
Assessing Officer issued summons to two persons namely, `M' and `R' who
did not appear before him. Subsequently, assessee filed a letter with
Assessing Officer along with affidavits of `M' and `R' in which both of
them had stated that transactions with assessee were genuine and earlier
statements recorded from them by the Investigation Wing were given
under pressure. The Assessing Officer, however, did not accept those
affidavits and made certain additions to the income of the assessee
under Section 68. But, Hon.Tribunal, taking a view that there was no
dispute about identity of shareholders namely `M' and `R', deleted
addition made by the Assessing Officer. On revenue's appeal, it was
noted by the Hon. High Court that both `M' and `R' had admitted before
Additional Director (Investigation) that they were acting as
accommodation entry providers. They had also given a list of 22
companies in which they were operating accounts. It was also apparent
that out of 22 companies whose names figured in information given by
them to the Investigation Wing, 15 companies had provided so-called
`share subscription monies' to the assessee. It was held by the Hon.
High Court that on facts, there was specific involvement of
assessee-company in modus operandi followed by `M' and `R' and,
therefore, impugned order passed by Tribunal deleting addition was to be
set aside. It was held by the Hon. High Court that "the ratio of a
decision is to be understood and appreciated in the background of the
facts of that case. So understood, it will be seen that where the
complete particulars of the share applicants such as their names and
addresses, income tax file numbers, their creditworthiness, share
application forms and share holders' register, share transfer register
etc. are furnished to the Assessing Officer and the Assessing Officer
has not conducted any enquiry into the same or has no material in his
possession to show that those particulars are false and cannot be acted
upon, then no addition can be made in the hands of the company under
Section 68 and the remedy open to the revenue is to go after the share
applicants in accordance with law. We are afraid that we cannot apply
the ratio to a case, such as the present one, where the Assessing
Officer is in possession of material that discredits and impeaches the
particulars furnished by the assessee and also establishes the link
between self-confessed "accommodation entry providers", whose business
it is to help assessees bring into their books of account their
unaccounted monies through the medium of share subscription, and the
assessee. The ratio is inapplicable to a case, again such as the present
one, where the involvement of the assessee in such modus operandi is
clearly indicated by valid material made available to the Assessing
Officer as a result of investigations carried out by the revenue
authorities into the activities of such "entry providers". The existence
with the Assessing Officer of material showing that the share
subscriptions were collected as part of a pre-meditated plan – a
smokescreen – conceived and executed with the connivance or involvement
of the assessee excludes the applicability of the ratio. In our
understanding, the ratio is attracted to a case where it is a simple
question of whether the assessee has discharged the burden placed upon
him under Section 68 to prove and establish the identity and
creditworthiness of the share applicant and the genuineness of the
transaction. In such a case, the Assessing Officer cannot sit back with
folded hands till the assessee exhausts all the evidence or material in
his possession and then come forward to merely reject the same, without
carrying out any verification or enquiry into the material placed before
him. The case before us does not fall under this category and it would
be a travesty of truth and justice to express a view to the contrary.
Reference was also made on behalf of the assessee to the recent judgment
of a Division Bench of this court in CIT v. Oasis Hospitalities Private
Limited, (2011) 333 ITR 119. We have given utmost consideration to the
judgment. It disposes of several appeals in the case of different
assessees. These quoted observations clearly distinguish the present
case from CIT v Oasis Hospitalities P Ltd. (supra). Except for
discussing the modus operandi of the entry operators generally, the
Assessing Officer in that case had not shown whether any link between
them and the assessee existed. No enquiry had been made in this regard.
Further, the assessee had not been confronted with the material
collected by the investigation wing or was given an opportunity to cross
examine the persons whose statements were recorded by the investigation
wing.
In the case before us, not only did the material before the Assessing
Officer show the link between the entry providers and the
assessee-company, but the Assessing Officer had also provided the
statements of Mukesh Gupta and Rajan Jassal to the assessee in
compliance with the rules of natural justice. Out of the 22 companies
whose names figured in the information given by them to the
investigation wing, 15 companies had provided the so-called "share
subscription monies" to the assessee.
In the light of the above discussion, we are unable to uphold the order
of the Tribunal confirming the deletion of the addition of
Rs.1,18,50,000 made under Section 68 of the Act as well as the
consequential addition of Rs.2,96,250."
Another decision of Hon. Delhi High Court, which is most recent dated
21st December 2012 in the case of CIT vs. N R Portfolios Pvt. Ltd. in
ITA Nos. 134/2012 could be of utmost help for the assessing officers
dealing with the challenges of exposing accommodation entries and
bringing it to tax under Section 68 of the Act. In this case, the
assessee, a company, received Rs. 35 lakhs towards share allotment. As
the shareholders did not respond to summons, the AO assessed the said
sum as an unexplained credit under Section 68. On appeal, the CIT(A) and
Tribunal relied on Lovely Exports 216 CTR 195 (Del) & Divine
Leasing 299 ITR 268 (SC), held that as the assessee had furnished the
PAN, bank details and other particulars of the share applicants, it had
discharged the onus of proving the identity and credit-worthiness of the
investors and that the transactions were not bogus. It was also held
that the AO ought to have made enquiries to establish that the investors
had given accommodation entries to the assessee and that the money
received from them was the assessee's own undisclosed income. On appeal
by the department the Hon. High Court, held reversing the decision of
Ld.CIT(A) & Hon. Tribunal that:
Though in previous decisions (Lovely Exports) it was held that the
assessee cannot be faulted if the share applicants do not respond to
summons and that the Revenue authorities have the wherewithal to compel
anyone to attend legal proceedings, this is merely one aspect. An
assessee's duty to establish the source of the funds does not cease by
merely furnishing the names, addresses and PAN particulars, or relying
on entries in the Registrar of Companies webs ite. The company is
usually a private one and the share applicants are known to it since the
shares are issued on private placement basis. If the assessee has
access to the share applicant's PAN or bank account statement, the
relationship is closer than arm's length. Its request to such concerns
to participate in income tax proceedings, would, from a pragmatic
perspective, be quite strong. Also, the concept of "shifting onus" does
not mean that once certain facts are provided, the assessee's duties are
over. If on verification, the AO cannot contact the share applicants,
or the information becomes unverifiable, the onus shifts back to the
assessee. At that stage, if it falters, the consequence may well be an
addition underSection 68 (A. Govindarajulu Mudaliar 34 ITR 807 followed).
Another decision of utmost relevance is of Hon. ITAT Indore Bench in the
case of Vaibhav Cotton (P.) Ltd. vs. Income-tax Officer, 4(4) Indore,
[2012] 26
taxmann.com
352 (Indore.) In this case the assessee company had shown in its balance
sheet certain amount representing share capital received from a Kolkata
based company and some other individual investors. Face value of shares
was Rs. 10 and those shares were issued at a premium of Rs. 90 per
share. Next year, promoters/directors of assessee-company purchased
those shares back at a discount of 90 per cent. In order to ascertain
genuineness of share transactions, Assessing Officer issued notices to
Kolkata based company and other alleged shareholders which were returned
by postal authorities with a remark `left'. He also visited respective
banks through which money was routed by these investors and found that
cash was deposited immediately prior to issue of cheque to assessee and
accounts of those companies were closed immediately after transfer of
funds. Assessing Officer thus taking a view that share transactions were
not genuine, added amount in question to assessee's taxable which was
upheld by the Hon. Tribunal.
4. It is not necessary to establish that the money came back to the
books of the assessee as `entry' actually emanated from his coffers :
While dealing with doubtful cash credits, is it necessary for the
assessing officer to establish that the money came back to the books of
the assessee as `entry' actually emanated from the coffers of the
assessee? This issue has been decided by the Hon'ble Delhi High Court in
a recent decision dated 20.07.2012 in the case of Commissioner of
Income-tax vs Independent Media (P.) Ltd.210 TAXMANN 14(Delhi)(2012),
which is significant as the observation made by the Hon. Court in this
decision would be a great help in establishing the cases where `entries'
have been taken from paper companies. In this case it was alleged by
the Investigation wing that the assessee-company received share capital
from those persons who had given statements before Investigation wing
that they were entry providers giving accommodation entries after
receiving cash and after charging their commission. Assessee furnished
PAN of subscriber-companies, share application forms, board resolutions,
copy of bank statement, pay orders, confirmation from subscribers,
their income-tax returns, copies of their balance sheets, etc. However
it was held by the Hon. Court that if explanation adduced by assessee
with regard to identity and creditworthiness of subscriber-companies and
genuineness of transactions was not acceptable for valid reasons,
Assessing Officer could make addition under Section 68 and for that
purpose he would not be under any duty to further show or establish that
monies emanated from coffers of assessee-company. The Hon. Court
further observed that "We are unable to uphold the view of the Tribunal
that it is incumbent upon the Assessing Officer, on the facts and
circumstances of the case, to establish with the help of material on
record that the share monies had come or emanated from the assessee's
coffers. Section 68 of the Act casts no such burden upon the Assessing
Officer. This aspect has been considered more than 50 years back by the
Supreme Court in the case of A Govindarajulu Mudaliar v.CIT [1958] 34
ITR 807 where precisely the same argument was advanced before the
Supreme Court on behalf of assessee. The argument was rejected by the
Court."
4.1 The Hon'ble Court further referred that in the above case, Shri
Venkatarama Iyer, J. speaking for the Court observed as under: -
"Now the contention of the appellant is that assuming that he had failed
to establish the case put forward by him, it does not follow as a
matter of law that the amounts in question were income received or
accrued during the previous year, that it was the duty of the Department
to adduce evidence to show from what source the income was derived and
why it should be treated as concealed income. In the absence of such
evidence, it is argued, the finding is erroneous. We are unable to
agree. Whether a receipt is to be treated as income or not, must depend
very largely on the facts and circumstances of each case. In the present
case the receipts are shown in the account books of a firm of which the
appellant and Govindaswamy Mudaliar were partners. When he was called
upon to give explanation he put forward two explanations, one being a
gift of Rs. 80,000/- and the other being receipt of Rs. 42,000/- from
business of which he claimed to be the real owner. When both these
explanations were rejected, as they have been it was clearly upon to the
Income-tax Officer to hold that the income must be concealed income.
There is ample authority for the position that where an assessee fails
to prove satisfactorily the source and nature of certain amount of cash
received during the accounting year, the Income-tax Officer is entitled
to draw the inference that the receipt are of an assessable nature. The
conclusion to which the Appellate Tribunal came appears to us to be
amply warranted by the facts of the case. There is no ground for
interfering with that finding, and these appeals are accordingly
dismissed with costs."
5. Responsibility towards source of source :
In ordinary circumstances, assessee's burden is confined to prove
creditworthiness of creditor with reference to transaction between
assessee and creditor. It was so held in Nemi Chand Kothari v. CIT
[2004] 136 Taxman 213 (Gau.),that a harmonious construction of Section
106 of the Evidence Act and Section 68 of the Income-tax Act will be
that though apart from establishing the identity of the creditor, the
assessee must establish the genuineness of the transaction as well as
the creditworthiness of his creditor, the burden of the assessee to
prove the genuineness of the transactions as well as the
creditworthiness of the creditor must remain confined to the
transactions, which have taken place between the assessee and the
creditor. What follows, as a corollary, is that it is not the burden of
the assessee to prove the genuineness of the transactions between his
creditor and sub-creditors nor is it the burden of the assessee to prove
that the sub-creditor had the creditworthiness to advance the cash
credit to the creditor from whom the cash credit has been, eventually,
received by the assessee. It is not the business of the assessee to find
out the source of money of his creditor or of the genuineness of the
transaction, which took place between the creditor and sub-creditor
and/or creditworthiness of the sub-creditors, since, these aspects may
not be within the special knowledge of the assessee.
5.1 However, on this issue, it is important to keep in mind that it may
not be the responsibility of the assessee to prove source of source but
nothing precludes the assessing officer to make enquiry in respect of
the source of the source as well to establish that both the source and
it's source are part of a larger chain of `paper companies' engaged in
the business of providing accommodation entries to the willing tax
evaders. Once a valid presumption is raised by way of an enquiry about
the genuineness of transaction between the source and it's source the
same could be used as an evidence to doubt the integrity of the source
of the assessee and to raise a valid presumption about the transaction
between the assessee and it's source being not genuine.
6. Test of human probability :
As has been discussed earlier, the issue of shifting of onus in the
cases of cash credit is a complex one and each case has to be examined
in it's own facts and circumstances. Hence, in the cases of `fake loan'
from `paper companies' the theory of preponderance of human probability
as pronounced by the Hon. Apex Court in the cases of CIT v. Durga Prasad
More [1971] 82 ITR 540 and Sumati Dayal v. CIT [1995] 80 Taxman 89/214
ITR 801 (SC) is of utmost importance. In the cases where it has been
established that the source company is a mere `paper company' solely
engaged in the activity of providing accommodation entries, the
presumption on the basis of human probability may be referred to by the
assessing officers to fortify their findings.
6.1 Hon. Supreme Court in CIT v. Durga Prasad More [1971] 82 ITR 540 ,
at pages 545-547 made a reference to the test of human probabilities in
the following fact situation : –
"… Now we shall proceed to examine the validity of those grounds that
appealed to the learned judges. It is true that an apparent must be
considered real until it is shown that there are reasons to believe that
the apparent is not the real. In a case of the present kind a party who
relies on a recital in a deed has to establish the truth of those
recitals, otherwise it will be very easy to make self-serving statements
in documents either executed or taken by a party and rely on those
recitals. If all that an assessee who wants to evade tax is to have some
recitals made in a document either executed by him or executed in his
favour then the door will be left wide-open to evade tax. A little
probing was sufficient in the present case to show that the apparent was
not the real. The taxing authorities were not required to put on
blinkers while looking at the documents produced before them. They were
entitled to look into the surrounding circumstances to find out the
reality of the recitals made in those documents.
Now, coming to the question of onus, the law does not prescribe any
quantitative test to find out whether the onus in a particular case has
been discharged or not. It all depends on the facts and circumstances of
each case. In some cases, the onus may be heavy whereas, in others, it
may be nominal. There is nothing rigid about it. Herein the assessee was
receiving some income. He says that it is not his income but his wife's
income. His wife is supposed to have had two lakhs of rupees neither
deposited in banks nor advanced to others but safely kept in her
father's safe. Assessee is unable to say from what source she built-up
that amount. Two lakhs before the year 1940 was undoubtedly a big sum.
It was said that the said amount was just left in the hands of the
father-in-law of the assessee. The Tribunal disbelieved the story, which
is, prima facie, a fantastic story. It is a story that does not accord
with human probabilities. It is strange that the High Court found fault
with the Tribunal for not swallowing that story. If that story is found
to be unbelievable as the Tribunal has found, and in our opinion
rightly, then the position remains that the consideration for the sale
proceeded from the assessee and, therefore, it must be assumed to be his
money.
It is surprising that the High Court has found fault with the Income-tax
Officer for not examining the wife and the father-in-law of the
assessee for proving the department's case. All that we can say is that
the High Court has ignored the facts of life. It is unfortunate that the
High Court has taken a superficial view of the onus that lay on the
department.
`…Science has not yet invented any instrument to test the reliability of
the evidence placed before a Court or Tribunal. Therefore, the Courts
and Tribunals have to judge the evidence before them by applying the
test of human probabilities. Human minds may differ as to the
reliability of a piece of evidence. But, in that sphere, the decision of
the final fact-finding authority is made conclusive by law." (p. 545)
6.2 The test of human probabilities has been emphasized in yet another
decision of the Hon. Supreme Court in the case of Sumati Dayal v. CIT
[1995] 80 Taxman 89/214 ITR 801 (SC). It was held in this case that in
view of Section 68, where any sum is found credited in the books of the
assessee for any previous year, the same may be charged to income-tax as
the income of the assessee of the previous year if the explanation
offered by the assessee about the nature and source thereof, is, in the
opinion of the Assessing Officer, not satisfactory. In such case there
is prima facie evidence against the assessee, viz., the receipt of
money, and if he fails to rebut the same, the said evidence being
unrebutted can be used against him by holding that it is a receipt of an
income nature. While considering the explanation of the assessee, the
department cannot, however, act unreasonable.
6.3 Why this decision is so important while dealing with cases of `fake
loan' from `paper companies', because it acknowledges that what is
apparent may not be real and test of human probabilities has to be
applied to understand if the apparent is real and if the transaction
fails to withstand the test of human probabilities it has to be taken as
an in-genuine transaction even if documentary evidences suggest
otherwise. In this case, the assessee, a dealer in art pieces, had shown
income from horse-race winnings in two consecutive accounting years.
The assessing officer did not accept this and made addition under
Section 68 which was confirmed by the Appellate Assistant Commissioner.
Thereafter the assessee approached the Settlement Commission. The
Settlement Commission also took the view that the claim of winnings in
races was false and what were passed off as such winnings really
represented the appellants taxable income from some undisclosed sources.
Hon. Supreme Court also agreed with the Settlement Commission saying
that after considering the surrounding circumstances and applying the
test of human probabilities the Commission had rightly concluded that
the assessee's claim about the amount being her winnings from races was
not genuine.
6.4 The test of human probability often comes to the help of the revenue
to track unaccounted income. This could be a great help in exposing the
`fake loans' from `paper companies' as well. In one of its special
kinds, the test of human probability made an assessee pay huge amount of
tax in Som Nath Maini v. CIT [2008] 306 ITR 414 (Punj. & Har.). In
this case, the assessee in his return declared loss from sale of gold
jewellery and also declared a short-term capital gain from sale of
shares so that the two almost match each other. This simple tax planning
became ineffective after the Assessing Officer disbelieved the
astronomical share price increase applying the test of human
probability. The Assessing Officer observed that short-term capital
gains were not genuine in as much as the assessee had purchased 45000
shares of Ankur International Ltd. at varying rates from Rs. 2.06 to Rs.
3.1 per share and sold them within a short span of six-seven months at
the rate varying from Rs. 47.75 paisa to Rs. 55. Even though the two
respective transactions for purchase and sale of shares were routed
through two different brokers, yet the Assessing Officer did not believe
the astronomical rise in share price of a company from Rs. 3 to Rs. 55
in a short-term.The assessee lost its case before the Tribunal.
Confirming the order of the Tribunal, the Punjab and Haryana High Court
held that the burden of proving that income is subject to tax is on the
revenue but, on the facts, to show that the transaction is genuine,
burden is primarily on the assessee. As per the Court, the Assessing
Officer is to apply the test of human probabilities for deciding
genuineness or otherwise of a particular transaction. Mere leading of
the evidence that the transaction was genuine, cannot be conclusive. Any
such evidence is required to be assessed by the Assessing Officer in a
reasonable way. Genuineness of the transaction can be rejected in case
the assessee leads evidence which is not trustworthy, and the department
does not lead any evidence on such an issue.
7. Responsibility of the Assessing Officer :
There is no denying to the fact that in the case of cash credit the
primary onus is on the assessee and where the assessee fails to
discharge such onus the Assessing Officer is well within his
jurisdiction to treat the cash credit as income of the assessee within
the meaning of Section 68 of the Act. However, the balance of burden in
the case of cash credits is delicate and complex and unless and until
the Assessing Officer shows his intention to make enquiry to examine the
truth, the additions made under Section 68 in the cases of `fake loan'
from `paper companies' would not get affirmation of the appellate
authorities. In the cases of loans from `paper companies', additions are
often made by the Assessing Officers by highlighting the defects in the
submission of the assessee without making further enquiries which does
not help the case of revenue as merely highlighting defects in the
submission of the assessee without making any further enquiry would in
most cases be not accepted as sufficient to reach a conclusion that
entry of such loan represents income of the assessee.
Some example of the same is given below for illustration:
1. The assessee has provided name, address and PAN of the creditor but did not provide confirmations from him.
2. Confirmatory letters from the creditors were filed but the creditors were not produced for examination.
3. Summons issued under Section 131 to the creditors but they did not respond to the summons.
4. The letters sent to the creditors at the given address returned unserved with comment "not found" or "inadequate address".
5. The confirmation of the creditor was filed but his bank statement was
not produced or his credit worthiness have not been established.
7.1 It must be kept in mind that such instances could be the
circumstances to have a valid doubt as to the genuineness of the loan
but these alone would not be sufficient to have a valid presumption as
to the fact that the cash credit represents income of the assessee.
Under Section 68 of the Act, the Assessing Officer has jurisdiction to
make enquiries with regard to the nature and source of the sums credited
in the books of account of the assessee and it is immaterial as to
whether the amount so credited is given the colour of a loan or share
application money or sale proceeds. The use of the words "any sum
credited in the books" in Section 68 indicates that the section is very
widely worded and the Assessing Officer is not precluded from making an
enquiry as to the true nature and source of the sum credited in the
accounts even if it is credited as loan from another company. The
Assessing Officer would be entitled, and it would indeed be his duty to
enquire whether the alleged creditors do in fact exist or not and
whether the loan shown in the garb of a credit from a company is nothing
but an accommodation entry routed through a paper company solely
existing for the purpose of providing such accommodation entries.
Although, given in the context of share application money, the decision
of Hon. Delhi High Court in the case of CIT vs. Sofia Finance Ltd. 205
ITR 98 (full bench) is extremely significant where explaining and rather
over ruling some observations of the division bench in Steller
Investment case which has been confirmed by the Hon. Supreme Court in
164 CTR 287 in a one line decision stating that no question of law arose
in such a case. The full bench observed as under :
"what is clear, however, is that Section 68 clearly permits an ITO to
make enquires with regard to the nature and source of any of all the
sums credited in the books of account of the company irrespective of the
name and cloture or the source indicated by the assessee. In other
words, the truthfulness of the assertion of the assessee regarding the
nature and the source of the credit in his books of account can be gone
into by the ITO. In the case of Steller Investments Ltd., the ITO had
accepted the entries subscribed share capital. Section 68 of the Act was
not referred to and the observations in the said judgement cannot mean
that the ITO cannot or should not go into the position as to whether the
alleged share holder actually existed or not. If share holders are
identified and it is established that they have invested money in the
purchase of shares then the amount received by the company would be
regard as capital receipts and to that extent the observations in the
case of Steller Investment Ltd. are correct, but if, on the other hand,
the assessee offers new explanation at all or explanation offered is not
satisfactory then, the provision of Section 68 may be invoked."
7.2 It is, therefore, imperative on the part of the Assessing Officer to
make enquires as to the nature and source of cash credits and bring
evidence on record to expose the fact that the loan is a fake one
representing an accommodation entry from a paper company. Although, the
nature and extent of enquiry has to be case- specific so as to raise a
valid presumption to treat the loan as income of the assessee. However,
in the case of accommodation entries received through paper companies
the Assessing Officer can easily bring certain facts on record to
highlight that the loan received actually represents an accommodation
entry. It could be proved that the company providing loan exists only on
paper, it has no employees, the address given is only a postal address
and the company does not have any physical set up at the given address,
the same address is used as postal address for multiple companies
indulging in to the same activity of providing accommodation entries. It
could also possibly be proved that the directors of the companies are
non- existent or even if they exist, they are illiterate or semi
illiterate individuals who do not have competence or credibility to
operate any investment company. Examining the directors on oath under
Section 131 could also be a way to carry the enquiry further so as to
prove that they may be acting on behalf of some other person for petty
amounts received as salary or commission. It could also be proved that
the company is receiving huge amount as loan and giving the same to
other concerns without any apparent motive of conducting any actual
business and the directors of the company are not even aware of such
huge transactions made by the company for, considering the doctrine of
business purposes, the company should have a reason, other than
avoidance of taxes, for undertaking such transactions. Necessary
enquiries may also be made from the bank to examine the bank account of
the creditor and also to examine the person who has introduced such bank
accounts. In some of the cases, It may have been held that the assessee
do not have responsibilities to prove the source of the source, but
nothing precludes the Assessing Officer to examine even the source of
the source as a process of enquiry to bring the truth on record that
these companies work in a chain as conduit to provide accommodation
entries which does not represent any genuine transactions.
7.3 As discussed earlier, in number of decisions the efforts of the
Assessing Officers have been acknowledged and applauded by the appellate
authorities where enquires have been made and additional information
and evidences have been brought on record to raise a valid presumption
as to the cash credit being income of the assessee. It is, therefore,
required that the Assessing Officers properly analyse the individual
cases before them and, instead of solely depending on the submissions of
the assessee and highlighting the deficiency of the same, conduct
independent enquiry and bring additional facts and evidences on record
to raise a valid presumption, in favour of accommodation entry
representing income of the assessee, which could sustain the test of
appeal.
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Author
Sunil Kumar Jha
Addl. Commissioner of Income Tax, Central Range, Baroda
