Tuesday, April 23, 2013

ITR (TRIB) Volume 23 : Part 2 (Issue dated : 22-4-2013) SUBJECT INDEX


ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB))
Volume 23 : Part 2 (Issue dated : 22-4-2013)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

Advance tax --Interest--Assessee not liable to pay interest--Income-tax Act, 1961, s. 234B-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

Appeal to Appellate Tribunal --Power to admit additional grounds--Legal grounds not requiring investigation into facts--To be admitted--Income-tax Act, 1961, s. 254-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

----Rectification of mistake--Exemption--Export-
oriented undertaking--Tribunal inadvertently miscalculating number of assessment years for which exemption available--Mistake to be rectified--Change of year goes to root of order--Earlier order recalled--Income-tax Act, 1961-- Assistant CIT v. Qmax Test Equipments P. Ltd. (Chennai) . . . 187

Appeal to Commissioner (Appeals) --Power to enhance income--Income from different products manufactured under same licence agreement--Commissioner (Appeals) entitled to enhance income--Income-tax Act, 1961, s. 251-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

Capital gains --Agreement for development of property cancelled and agreement for sale and irrevocable power of attorney executed within same party--Device to reduce tax--Advance received under first agreement and forfeited and sums received as damages together constitute part of consideration for sale--Taxable as capital gains--Income-tax Act, 1961-- Hyderabad Bottling Co. Ltd. v. Deputy CIT (Hyderabad) . . . 175

----Business income--Purchase of land for agricultural purposes--No evidence that borrowed capital used for purchase--Land held as an asset--Surplus realised on asset to be taxed as capital gains--Not business income--Income-tax Act, 1961-- Additional CIT v. Delhi Apartment P. Ltd. (Delhi) . . . 217

----Transfer of asset--Date of transfer--No agreement signed or possession delivered in relevant year--Gains cannot be taxed in that year--Income-tax Act, 1961, ss. 2(47), 45-- Additional CIT v. Delhi Apartment P. Ltd. (Delhi) . . . 217

Non-resident --Burden of proof--Income deemed to accrue or arise in India--Conditions precedent--Business carried on in India--Sale to party in India without operations carried out in India not business in India--Licence granted by assessee of patented CDMA technology to non-resident original equipment manufacturers to make and sell CDMA handsets and wireless equipment in consideration for royalty--Royalty determined with reference to net selling price of product to unrelated wireless carriers worldwide--Sale of products manufactured using patented technology to wireless carriers located in India for sale to end users in India--Licence not specific to any particular country--Licence not used in India--Not established that patents licensed by assessee used for installation activities in India--Patents having nothing to do with functionality of handsets--Original equipment manufacturers themselves not brought to tax--Title to equipment passing in high seas--Mere passing of title does not result in income being attributable in India--Software not provided as part of licensing of assessee’s patents--Source of royalty was place where patent exploited which was outside India--Indian telecom operators not source of income for original equipment manufacturers--Not established that original equipment manufacturers used assessee’s patents for carrying on business in India or making or earning income from source in India--Royalty paid by original equipment manufacturers to assessee not taxable--Income-tax Act, 1961, s. 9(1)(vi)(c)--Double Taxation Avoidance Agreement between India and the United States of America, art. 12(7)(b)-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

----Fees for technical services--Payments to non-resident divers under contract for provision of underwater services in Saudi Arabia--Technical fee paid to carry out business outside India for earning income from a source outside India--Assessee not liable for tax deducted at source--Income-tax Act, 1961, s. 9(1)(vii)-- Aqua Omega Services P. Ltd. v. Assistant CIT (Chennai) . . . 191

Penalty --Failure to file return of tax deducted at source within specified time--Penalty levied unilaterally without finding whether banks need to file statements--Statements produced by assessee uploaded by franchisee in single day for all four quarters--Particulars uploaded by franchisee without permanent account numbers of deductees--Levy of penalty not justified--Income-tax Act, 1961, s. 272A(2)(k)-- Branch Manager (TDS), UCO Bank v. Additional CIT (Cuttack) . . . 209

Reassessment --Reason to believe income escaped assessment--Sufficient if one ground out of many tenable--Facts contradicting basis of belief subsequently surfacing later in course of assessment not to vitiate proceedings--No stipulation that Assessing Officer to furnish reasons for reopening with notice--Newspaper reports can constitute information or material--Income-tax Act, 1961, ss. 147, 148-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

----Reason to believe that income escaped assessment--Tax deducted at source--No presumption that there was no escapement of income--Income-tax Act, 1961, s. 147-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

----Sanction of Commissioner--Findings of Additional Director typed--Does not mean sanction accorded without application of mind--Joint Director authorised to exercise power of Additional Commissioner--Sanction for issue of notice was by an appropriate authority--Income-tax Act, 1961, ss. 2(28C), 151-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

Return of income --Failure to file--Interest--Levy of interest under section 234A proper--Income-tax Act, 1961, s. 234A-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

Revision --Commissioner--Erroneous and prejudicial to Revenue--Order passed without application of mind--Liable to be revised--Industrial undertaking--Special deduction--Assessing Officer accepting nil return of assessee and allowing claim to deduction under section 80-IA without enquiry whether assessee fulfilled conditions for eligibility therefor--Revision proper--Income-tax Act, 1961, ss. 80-IA, 263-- Vodafone Essar Ltd. v. CIT (Chandigarh) . . . 147

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Double Taxation Avoidance Agreement between India and the United States of America :

Art. 12(7)(b) --Non-resident--Burden of proof--Income deemed to accrue or arise in India--Conditions precedent--Business carried on in India--Sale to party in India without operations carried out in India not business in India--Licence granted by assessee of patented CDMA technology to non-resident original equipment manufacturers to make and sell CDMA handsets and wireless equipment in consideration for royalty--Royalty determined with reference to net selling price of product to unrelated wireless carriers worldwide--Sale of products manufactured using patented technology to wireless carriers located in India for sale to end users in India--Licence not specific to any particular country--Licence not used in India--Not established that patents licensed by assessee used for installation activities in India--Patents having nothing to do with functionality of handsets--Original equipment manufacturers themselves not brought to tax--Title to equipment passing in high seas--Mere passing of title does not result in income being attributable in India--Software not provided as part of licensing of assessee’s patents--Source of royalty was place where patent exploited which was outside India--Indian telecom operators not source of income for original equipment manufacturers--Not established that original equipment manufacturers used assessee’s patents for carrying on business in India or making or earning income from source in India--Royalty paid by original equipment manufacturers to assessee not taxable-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

Income-tax Act, 1961 :

S. 2(28C) --Reassessment--Sanction of Commissioner--Findings of Additional Director typed--Does not mean sanction accorded without application of mind--Joint Director authorised to exercise power of Additional Commissioner--Sanction for issue of notice was by an appropriate authority-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

S. 2(47) --Capital gains--Transfer of asset--Date of transfer--No agreement signed or possession delivered in relevant year--Gains cannot be taxed in that year-- Additional CIT v. Delhi Apartment P. Ltd. (Delhi) . . . 217

S. 9(1)(vi)(c) --Non-resident--Burden of proof--Income deemed to accrue or arise in India--Conditions precedent--Business carried on in India--Sale to party in India without operations carried out in India not business in India--Licence granted by assessee of patented CDMA technology to non-resident original equipment manufacturers to make and sell CDMA handsets and wireless equipment in consideration for royalty--Royalty determined with reference to net selling price of product to unrelated wireless carriers worldwide--Sale of products manufactured using patented technology to wireless carriers located in India for sale to end users in India--Licence not specific to any particular country--Licence not used in India--Not established that patents licensed by assessee used for installation activities in India--Patents having nothing to do with functionality of handsets--Original equipment manufacturers themselves not brought to tax--Title to equipment passing in high seas--Mere passing of title does not result in income being attributable in India--Software not provided as part of licensing of assessee’s patents--Source of royalty was place where patent exploited which was outside India--Indian telecom operators not source of income for original equipment manufacturers--Not established that original equipment manufacturers used assessee’s patents for carrying on business in India or making or earning income from source in India--Royalty paid by original equipment manufacturers to assessee not taxable-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

S. 9(1)(vii) --Non-resident--Fees for technical services--Payments to non-resident divers under contract for provision of underwater services in Saudi Arabia--Technical fee paid to carry out business outside India for earning income from a source outside India--Assessee not liable for tax deducted at source-- Aqua Omega Services P. Ltd. v. Assistant CIT (Chennai) . . . 191

S. 45 --Capital gains--Transfer of asset--Date of transfer--No agreement signed or possession delivered in relevant year--Gains cannot be taxed in that year-- Additional CIT v. Delhi Apartment P. Ltd. (Delhi) . . . 217

S. 80-IA --Revision--Commissioner--Erroneous and prejudicial to Revenue--Order passed without application of mind--Liable to be revised--Industrial undertaking--Special deduction--Assessing Officer accepting nil return of assessee and allowing claim to deduction under section 80-IA without enquiry whether assessee fulfilled conditions for eligibility therefor--Revision proper-- Vodafone Essar Ltd. v. CIT (Chandigarh) . . . 147

S. 147 --Reassessment--Reason to believe income escaped assessment--Sufficient if one ground out of many tenable--Facts contradicting basis of belief subsequently surfacing later in course of assessment not to vitiate proceedings--No stipulation that Assessing Officer to furnish reasons for reopening with notice--Newspaper reports can constitute information or material-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

----Reassessment--Reason to believe that income escaped assessment--Tax deducted at source--No presumption that there was no escapement of income-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

S. 148 --Reassessment--Reason to believe income escaped assessment--Sufficient if one ground out of many tenable--Facts contradicting basis of belief subsequently surfacing later in course of assessment not to vitiate proceedings--No stipulation that Assessing Officer to furnish reasons for reopening with notice--Newspaper reports can constitute information or material-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

S. 151 --Reassessment--Sanction of Commissioner--Findings of Additional Director typed--Does not mean sanction accorded without application of mind--Joint Director authorised to exercise power of Additional Commissioner--Sanction for issue of notice was by an appropriate authority-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

S. 234A --Return of income--Failure to file--Interest--Levy of interest under section 234A proper-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

S. 234B --Advance tax--Interest--Assessee not liable to pay interest-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

S. 251 --Appeal to Commissioner (Appeals)--Power to enhance income--Income from different products manufactured under same licence agreement--Commissioner (Appeals) entitled to enhance income-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

S. 254 --Appeal to Appellate Tribunal--Power to admit additional grounds--Legal grounds not requiring investigation into facts--To be admitted-- Qualcomm Incorporated v. Additional Director of Income-tax (Delhi) . . . 239

S. 263 --Revision--Commissioner--Erroneous and prejudicial to Revenue--Order passed without application of mind--Liable to be revised--Industrial undertaking--Special deduction--Assessing Officer accepting nil return of assessee and allowing claim to deduction under section 80-IA without enquiry whether assessee fulfilled conditions for eligibility therefor--Revision proper-- Vodafone Essar Ltd. v. CIT (Chandigarh) . . . 147

S. 272A(2)(k) --Penalty--Failure to file return of tax deducted at source within specified time--Penalty levied unilaterally without finding whether banks need to file statements--Statements produced by assessee uploaded by franchisee in single day for all four quarters--Particulars uploaded by franchisee without permanent account numbers of deductees--Levy of penalty not justified-- Branch Manager (TDS), UCO Bank v. Additional CIT (Cuttack) . . . 209


Monday, April 22, 2013

SURRENDER OF INCOME WITHOUT EXPLANATION IS NOT A VOLUNTARY DISCLOSURE

SURRENDER OF INCOME WITHOUT EXPLANATION IS NOT A VOLUNTARY DISCLOSURE

In `Commissioner of Income Tax V. Mak Data Limited' – 2013 (1) TMI 574 - DELHI HIGH COURT there was a survey under Section 133A on 16.12.2003, in the course of which some documents pertaining to the assessee were found and impounded. The said documents consisted of blank transfer deeds for shares duly signed, affidavits, share application forms, copies of bank accounts, income tax returns and assessment orders of certain other companies. The assessee was called for to explain the contents of the documents and the genuineness of the transactions represented by them. In response to the notice it was replied that the company had received share application money from different entities aggregating to a sum of Rs.239 lakhs during the years 2003-03 to 2004-05.

The company with a view to avoid litigation and buy peace and to channelize the energy and resources towards the productive work and to make amicable settlement with the Income Tax Department offers to surrender a sum of Rs.56.49 lakhs as income from other sources. Shri V.K. Aggarwal, promoter director of the company, had offered a sum of Rs.182.51 lakhs for taxation as `income from other sources' in the hands of the partnership firm, M/s Marketing Services. He further stated that the assessee company has utilized this amount of Rs.182.51 lakhs for inducting funds into the books of the assessee company as share application money. The additional fund flow to the extent of Rs.56.49 lakhs which remain unexplained is now being offered for taxation by the company as the income from other sources.

The assessee filed an application before the Additional Commissioner of Income Tax under Section 144A soliciting directions for expediting the assessment proceedings and therein it indicated its willingness to be assessed on an amount of Rs.56.49 lakhs as its income under the head `income from other sources'. Before the Additional Commissioner the assessee scaled down the offer from Rs.56.49 lakhs to Rs.40.74 lakhs on the ground that the peak investment should be taken as Rs.219.5 lakhs instead of Rs.239 lakhs as calculated earlier.

The Assessing Officer, on the basis of the directions of the Additional Commissioner called upon the assessee to furnish the relevant documents and information regarding the fresh offer of Rs.40.74 lakhs. After verification this amount was added as `income from other sources'. There was no appeal against this order by the assessee and therefore the said order became final. Subsequently the Assessing Office initiated penalty proceedings for furnishing inaccurate information of the income under Section 271(1) (c). The assessee replied that the amount was offered as income only to buy peace and avoid protracted litigation and with the condition that no penalty or prosecution proceedings would be launched. The offer was made before any investigation was carried out into the matter and therefore, was voluntary. The Assessing Officer rejected the contention of the assessee and imposed the minimum penalty of Rs. 14,16,600/- for furnishing inaccurate particulars of the income to the tune of Rs. 40,74,000/- The reasons for rejection of the reply of the assessee are as below:

In the return filed by the assessee the assessee has not offered the amount of Rs.40.74 lakhs for taxation voluntarily;
The assessee has surrendered Rs.40.74 lakhs during course of assessment proceeding when the impounded material to the assessee which was impounded during course of survey at the business premise of marketing services;
The assessee has furnished inaccurate particulars of its income in the return of income filed on 27.10.2004 for the year under consideration;
The satisfaction was recorded at the time of completing assessment proceedings under Section 143(3) of the Act;
The assessee has itself surrendered for tax, the addition sum of Rs.40.74 lakhs which it was expected to explain the source of share application money. Moreover, admitted facts need not to be proved by the Assessing Officer, as in this case, the assessee itself admitted the concealing of income to the extent of Rs.40.74 lakhs by offering the amount for tax.
An appeal was preferred to the Commissioner of Income Tax (Appeals) who rejected the appeal and confirmed the penalty. The assessee filed further appeal before the Tribunal. The Tribunal cancelled the penalty imposed on the assessee recording the following findings:

It was only after the directions of the Additional Commissioner of Income Tax based under Section 144A that the assessee's offer was accepted and the assessment was finalized;
There was no material against the assessee to show any concealment and this fact has been admitted by the Assessing Officer himself; there is not even any indicated in the penalty order as to the particular credit in respect of which the penalty was being imposed;
The fact that the assessee surrendered the income only when it was confronted with the documents found in the survey does not adversely affect its case;
The assessee did not admit that it had concealed the income to the extent of Rs.40.74 lakhs; it has made it clear in the letter dated 22.11.2006 that the surrender was made without any admission of concealment or intention to conceal;
The offer was made in a spirit of settlement of the dispute with the Revenue and no investigation was carried out by the Assessing Officer to prove the concealment.
The Revenue, being aggrieved by the order of the Tribunal filed the present appeal before the High Court. The Revenue contended that the Tribunal failed to appreciate the provisions of Explanation 1 to Section 271(1) (c) of the Act, which reads as below:

Explanation 1.- Where in respect of any facts material to the computation of the total income of any person under this Act.-

(A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false; or

(B) Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then the amount added or disallowed in computing the total number of such person as a result thereof shall, for the purpose of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.

The High Court held that the Revenue is right in contending that there was absolutely no explanation from the assessee in respect of the amount of Rs.40.74 lakhs; when the Assessing Officer called upon the assessee to produce the evidence as to the nature and source of the amount received as share capital, the creditworthiness of the applicants and the genuineness of the transactions the assessee simply folded up and surrendered a sum of Rs.56.49 lakhs in its hands initially, which was later scaled down to Rs.40.74 lakhs. The assessee merely stated that with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income Tax Department, it surrendered the income under the head `income from other sources'. In the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation 1 is attracted. It cannot be denied that the nature and source of the amount surrendered are facts material to computation of the total income of the Revenue.

The High Court further held that the Revenue is entitled to know the same and if the nature of the source of the amount is not explained, it is entitled to draw the inference that the amount represents the assessee's table income. Though this principle was originally confined to the assessment proceedings, the Explanation has extended it to penalty proceedings also, presumably on the assumption that the furnishing of an explanation regarding the nature and source would have compromised the assessee's position. It is the assessee who has received the monies and is in the knowledge of all the facts relevant and material in relation to the receipt. Therefore it should be in a position to offer an explanation and disclose the material facts regarding the same. The High Court set aside the order of the
Tribunal and confirmed the findings of lower authorities below.

INCOME TAX REPORTS (ITR)

Volume 352 Part 3 (Issue dated 22-4-2013)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

HIGH COURTS

Capital gains --Business income--Trading or investment--Long-term capital gains--Assessee treating land as fixed asset for a long time and using it for agricultural purposes--No evidence that assessee purchased land by funds borrowed--Sale proceeds resulting long-term capital gains and not business income--Income-tax Act, 1961-- CIT v. Delhi Apartments Pvt. Ltd. (Delhi) . . . 322

Capital or revenue expenditure --Company--Expenditure on debenture--Debenture to be converted subsequently to shares--Expenditure deductible--Income-tax Act, 1961, s. 37-- CIT v . Havells India Ltd . (Delhi) . . . 376

----Expenditure on installation of new unit--Finding that new unit constituted extension of existing business and there was common management--Expenditure deductible--Income-tax Act, 1961, s. 37-- CIT v. Havells India Ltd .

(Delhi) . . . 376

----Expenditure relating to voluntary retirement scheme in respect of two units of assessee--Closure of two units not resulting in closure of business of assessee--Expenditure incurred for purpose of restructuring to achieve modernisation--Allowable as revenue expenditure--Income-tax Act, 1961, s. 37(1)-- CIT v. Foseco India Ltd .

(Bom) . . . 320

Deduction of tax at source --Non-resident--Effect of section 9(1)(vii)(b)--Meaning of source of income--Manufacture of products in India--Payment to US company for certification facilitating export--Source of income within India--Section 9(1)(vii) applicable--Question of liability under DTAA between USA and India not considered--Matter remanded--Income-tax Act, 1961, ss. 9(1)(vii), 40(a)(ia), 195-- CIT v . Havells India Ltd. (Delhi) . . . 376

Exemption --Educational institution--Denial of exemption under section 10(23C)(vi)--Registration under section 12A cannot be cancelled on basis of order denying exemption--Exemption can be claimed without applying for registration--Both are independent proceedings--Income-tax Act, 1961, ss. 10(23C)(vi), 12A-- CIT v . Society of Advanced Management Studies (All) . . . 269

Export --Special deduction--Different units of assessee engaged in manufacturing of different goods--Does not make separate units of assessee separate and different assessable units--Loss of one division to be adjusted against profit of other division for purposes of computation of deduction under section 80HHC--Income-tax Act, 1961, s. 80HHC-- Madhav Marbles and Granites Ltd. v. Asst. CIT (Raj) . . . 331

Income --Accrual of income--No transfer of possession during previous year relevant to assessment year 2006-07 but only receipt of advance--Execution of sale deed in following year--Amount received as advance not taxable in assessment year 2006-07--Income-tax Act, 1961-- CIT v . Delhi Apartments Pvt. Ltd . (Delhi) . . . 322

Penalty --Concealment of income--Transactions disclosed in return--Claim of expenditure to be revenue--Disallowance of claim--Assessee not liable for penalty--Income-tax Act, 1961, s. 271(1)(c)-- CIT v . Amtek Auto Ltd . (P&H) . . . 394

----Deposit in cash exceeding prescribed limit--Limitation--Six months from date of initiation of action for levy of penalty--Period to be reckoned from date of issue of first show cause for penalty and not from issue of first show cause by Joint Commissioner--Income-tax Act, 1961, ss. 269SS, 271D, 275(1)(c)-- CIT v . Jitendra Singh Rathore

(Raj) . . . 327

Reassessment --Limitation--Requirements only that reasons be recorded and notice be issued before expiry of time limit--Delay in supplying reasons recorded by Assessing Officer to assessee would not invalidate reassessment proceedings--Income-tax Act, 1961, ss. 147, 148, 149-- A. G. Holdings Pvt. Ltd . v . ITO (Delhi) . . . 364

----Notice--Validity--Original assessment granting special deduction under section 80-IA(4) after detailed enquiry--Reassessment proceedings to withdraw special deduction on ground that assessee not entitled to special deduction--Mere change of opinion--Notice not valid--Income-tax Act, 1961, ss. 80-IA, 147, 148-- Parixit Industries P. Ltd . v . Asst. CIT (OSD) (Guj) . . . 349

----Notice after four years--Conditions precedent--Information regarding transport subsidy available in audited accounts and statements furnished by assessee to Assessing Officer with assessee’s return--Reassessment adding transport subsidy as taxable income of assessee--Not valid--Income-tax Act, 1961, ss. 147, 148-- CIT v. Sonitpur Solvex Ltd. (Gauhati) . . . 305

----Notice after four years--Failure by assessee to disclose material facts--Documents attached to return only statutory auditor’s report and final accounts--Nothing disclosing specifically receipt of share capital of Rs. 4,50,000 from Q--Report of investigation wing on basis of which assessment reopened containing specific information that assessee received as accommodation entry Rs. 4,50,000 from Q with bank account particulars and instrument number--Reopening of assessment proper--Income-tax Act, 1961, ss. 147, 148-- A. G. Holdings Pvt. Ltd . v . ITO (Delhi) . . . 364

Recovery of tax --Provisional attachment--Assessment thereafter completed--Revenue not justified in attaching entire amount standing to the credit of assessee over and above demand raised against assessee--Income-tax Act, 1961, s. 281B-- Nirmal Singh v . Union of India (P&H) . . . 396

Return of income --Intimation--Deduction of tax at source--Credit for--Refunds--Adjustment of refund--Central processing centre--Hardships faced by assessees owing to faulty processing of returns and uploading of details of tax deducted at source--High Court--Directions given to Department and Central Board of Direct Taxes--Income-tax Act, 1961, ss. 143(1), 154, 201, 203, 244A, 245-- Court on its own Motion v . CIT

(Delhi) . . . 273

Revision --Commissioner--Powers--

Rectification of mistakes--Order rejecting application in absence of revised return--Natural justice--Non-speaking order rejecting revision on ground of availability of alternative remedy of appeal not valid--Commissioner to decide petition on merits--Income-tax Act, 1961, ss. 154, 263-- Universal Packaging v. CIT (Bom) . . . 398

Search and seizure --Refund of excess amounts seized--Interest on refund--Period for which interest payable--Refund as a result of appellate order--Interest payable from date of original assessment order--Adjustment of tax liability of brother of assessee not justified--Assessee entitled to interest for amount seized--Income-tax Act, 1961, s. 132B(3)-- G. L. Jain v . CIT (Delhi) . . . 339

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Income-tax Act, 1961 :

S. 9(1)(vii) --Deduction of tax at source--Non-resident--Effect of section 9(1)(vii)(b)--Meaning of source of income--Manufacture of products in India--Payment to US company for certification facilitating export--Source of income within India--Section 9(1)(vii) applicable--Question of liability under DTAA between USA and India not considered--Matter remanded-- CIT v . Havells India Ltd. (Delhi) . . . 376

S. 10(23C)(vi) --Exemption--Educational institution--Denial of exemption under section 10(23C)(vi)--Registration under section 12A cannot be cancelled on basis of order denying exemption--Exemption can be claimed without applying for registration--Both are independent proceedings-- CIT v . Society of Advanced Management Studies (All) . . . 269

S. 12A --Exemption--Educational institution--Denial of exemption under section 10(23C)(vi)--Registration under section 12A cannot be cancelled on basis of order denying exemption--Exemption can be claimed without applying for registration--Both are independent proceedings-- CIT v . Society of Advanced Management Studies
(All) . . . 269

S. 37 --Capital or revenue expenditure--Company--Expenditure on debenture--Debenture to be converted subsequently to shares--Expenditure deductible-- CIT v . Havells India Ltd . (Delhi) . . . 376

----Capital or revenue expenditure--Expenditure on installation of new unit--Finding that new unit constituted extension of existing business and there was common management--Expenditure deductible-- CIT v. Havells India Ltd . (Delhi) . . . 376

S. 37(1) --Capital or revenue expenditure--Expenditure relating to voluntary retirement scheme in respect of two units of assessee--Closure of two units not resulting in closure of business of assessee--Expenditure incurred for purpose of restructuring to achieve modernisation--Allowable as revenue expenditure-- CIT v. Foseco India Ltd .
(Bom) . . . 320

S. 40(a)(ia) --Deduction of tax at source--Non-resident--Effect of section 9(1)(vii)(b)--Meaning of source of income--Manufacture of products in India--Payment to US company for certification facilitating export--Source of income within India--Section 9(1)(vii) applicable--Question of liability under DTAA between USA and India not considered--Matter remanded-- CIT v . Havells India Ltd. (Delhi) . . . 376

S. 80HHC --Export--Special deduction--Different units of assessee engaged in manufacturing of different goods--Does not make separate units of assessee separate and different assessable units--Loss of one division to be adjusted against profit of other division for purposes of computation of deduction under section 80HHC-- Madhav Marbles and Granites Ltd. v. Asst. CIT (Raj) . . . 331

S. 80-IA --Reassessment--Notice--Validity--Original assessment granting special deduction under section 80-IA(4) after detailed enquiry--Reassessment proceedings to withdraw special deduction on ground that assessee not entitled to special deduction--Mere change of opinion--Notice not valid-- Parixit Industries P. Ltd . v . Asst. CIT (OSD) (Guj) . . . 349

S. 132B(3) --Search and seizure--Refund of excess amounts seized--Interest on refund--Period for which interest payable--Refund as a result of appellate order--Interest payable from date of original assessment order--Adjustment of tax liability of brother of assessee not justified--Assessee entitled to interest for amount seized-- G. L. Jain v . CIT (Delhi) . . . 339

S. 143(1) --Return of income--Intimation--Deduction of tax at source--Credit for--Refunds--Adjustment of refund--Central processing centre--Hardships faced by assessees owing to faulty processing of returns and uploading of details of tax deducted at source--High Court--Directions given to Department and Central Board of Direct Taxes-- Court on its own Motion v . CIT (Delhi) . . . 273

S. 147 --Reassessment--Limitation--Requirements only that reasons be recorded and notice be issued before expiry of time limit--Delay in supplying reasons recorded by Assessing Officer to assessee would not invalidate reassessment proceedings-- A. G. Holdings Pvt. Ltd . v . ITO (Delhi) . . . 364

----Reassessment--Notice--Validity--Original assessment granting special deduction under section 80-IA(4) after detailed enquiry--Reassessment proceedings to withdraw special deduction on ground that assessee not entitled to special deduction--Mere change of opinion--Notice not valid-- Parixit Industries P. Ltd . v . Asst. CIT (OSD)
(Guj) . . . 349

----Reassessment--Notice after four years--Conditions precedent--Information regarding transport subsidy available in audited accounts and statements furnished by assessee to Assessing Officer with assessee’s return--Reassessment adding transport subsidy as taxable income of assessee--Not valid-- CIT v. Sonitpur Solvex Ltd.
(Gauhati) . . . 305

----Reassessment--Notice after four years--Failure by assessee to disclose material facts--Documents attached to return only statutory auditor’s report and final accounts--Nothing disclosing specifically receipt of share capital of Rs. 4,50,000 from Q--Report of investigation wing on basis of which assessment reopened containing specific information that assessee received as accommodation entry Rs. 4,50,000 from Q with bank account particulars and instrument number--Reopening of assessment proper-- A. G. Holdings Pvt. Ltd . v . ITO (Delhi) . . . 364

S. 148 --Reassessment--Limitation--Requirements only that reasons be recorded and notice be issued before expiry of time limit--Delay in supplying reasons recorded by Assessing Officer to assessee would not invalidate reassessment proceedings-- A. G. Holdings Pvt. Ltd . v . ITO (Delhi) . . . 364

----Reassessment--Notice--Validity--Original assessment granting special deduction under section 80-IA(4) after detailed enquiry--Reassessment proceedings to withdraw special deduction on ground that assessee not entitled to special deduction--Mere change of opinion--Notice not valid-- Parixit Industries P. Ltd . v . Asst. CIT (OSD)
(Guj) . . . 349

----Reassessment--Notice after four years--Conditions precedent--Information regarding transport subsidy available in audited accounts and statements furnished by assessee to Assessing Officer with assessee’s return--Reassessment adding transport subsidy as taxable income of assessee--Not valid-- CIT v. Sonitpur Solvex Ltd.
(Gauhati) . . . 305

----Reassessment--Notice after four years--Failure by assessee to disclose material facts--Documents attached to return only statutory auditor’s report and final accounts--Nothing disclosing specifically receipt of share capital of Rs. 4,50,000 from Q--Report of investigation wing on basis of which assessment reopened containing specific information that assessee received as accommodation entry Rs. 4,50,000 from Q with bank account particulars and instrument number--Reopening of assessment proper-- A. G. Holdings Pvt. Ltd . v . ITO (Delhi) . . . 364

S. 149 --Reassessment--Limitation--Requirements only that reasons be recorded and notice be issued before expiry of time limit--Delay in supplying reasons recorded by Assessing Officer to assessee would not invalidate reassessment proceedings-- A. G. Holdings Pvt. Ltd . v . ITO (Delhi) . . . 364

S. 154 --Return of income--Intimation--Deduction of tax at source--Credit for--Refunds--Adjustment of refund--Central processing centre--Hardships faced by assessees owing to faulty processing of returns and uploading of details of tax deducted at source--High Court--Directions given to Department and Central Board of Direct Taxes-- Court on its own Motion v . CIT (Delhi) . . . 273

----Revision--Commissioner--Powers--Rectification of mistakes--Order rejecting application in absence of revised return--Natural justice--Non-speaking order rejecting revision on ground of availability of alternative remedy of appeal not valid--Commissioner to decide petition on merits-- Universal Packaging v. CIT (Bom) . . . 398

S. 195 --Deduction of tax at source--Non-resident--Effect of section 9(1)(vii)(b)--Meaning of source of income--Manufacture of products in India--Payment to US company for certification facilitating export--Source of income within India--Section 9(1)(vii) applicable--Question of liability under DTAA between USA and India not considered--Matter remanded-- CIT v . Havells India Ltd. (Delhi) . . . 376

S. 201 --Return of income--Intimation--Deduction of tax at source--Credit for--Refunds--Adjustment of refund--Central processing centre--Hardships faced by assessees owing to faulty processing of returns and uploading of details of tax deducted at source--High Court--Directions given to Department and Central Board of Direct Taxes-- Court on its own Motion v . CIT (Delhi) . . . 273

S. 203 --Return of income--Intimation--Deduction of tax at source--Credit for--Refunds--Adjustment of refund--Central processing centre--Hardships faced by assessees owing to faulty processing of returns and uploading of details of tax deducted at source--High Court--Directions given to Department and Central Board of Direct Taxes-- Court on its own Motion v . CIT (Delhi) . . . 273

S. 244A --Return of income--Intimation--Deduction of tax at source--Credit for--Refunds--Adjustment of refund--Central processing centre--Hardships faced by assessees owing to faulty processing of returns and uploading of details of tax deducted at source--High Court--Directions given to Department and Central Board of Direct Taxes-- Court on its own Motion v . CIT (Delhi) . . . 273

S. 245 --Return of income--Intimation--Deduction of tax at source--Credit for--Refunds--Adjustment of refund--Central processing centre--Hardships faced by assessees owing to faulty processing of returns and uploading of details of tax deducted at source--High Court--Directions given to Department and Central Board of Direct Taxes-- Court on its own Motion v . CIT (Delhi) . . . 273

S. 263 --Revision--Commissioner--Powers--Rectification of mistakes--Order rejecting application in absence of revised return--Natural justice--Non-speaking order rejecting revision on ground of availability of alternative remedy of appeal not valid--Commissioner to decide petition on merits-- Universal Packaging v. CIT
(Bom) . . . 398

S. 269SS --Penalty--Deposit in cash exceeding prescribed limit--Limitation--Six months from date of initiation of action for levy of penalty--Period to be reckoned from date of issue of first show cause for penalty and not from issue of first show cause by Joint Commissioner-- CIT v . Jitendra Singh Rathore (Raj) . . . 327

S. 271(1)(c) --Penalty--Concealment of income--Transactions disclosed in return--Claim of expenditure to be revenue--Disallowance of claim--Assessee not liable for penalty-- CIT v . Amtek Auto Ltd . (P&H) . . . 394

S. 271D --Penalty--Deposit in cash exceeding prescribed limit--Limitation--Six months from date of initiation of action for levy of penalty--Period to be reckoned from date of issue of first show cause for penalty and not from issue of first show cause by Joint Commissioner-- CIT v . Jitendra Singh Rathore (Raj) . . . 327

S. 275(1)(c) --Penalty--Deposit in cash exceeding prescribed limit--Limitation--Six months from date of initiation of action for levy of penalty--Period to be reckoned from date of issue of first show cause for penalty and not from issue of first show cause by Joint Commissioner-- CIT v . Jitendra Singh Rathore (Raj) . . . 327

S. 281B --Recovery of tax--Provisional attachment--Assessment thereafter completed--Revenue not justified in attaching entire amount standing to the credit of assessee over and above demand raised against assessee-- Nirmal Singh v . Union of India
(P&H) . . . 396

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Saturday, April 20, 2013

fake entries.

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 under
Section 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

fake entries.

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 under
Section 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