NEW DELHI, DEC 28, 2012: THE issues before the Bench are - Whether when the summons u/s 131 are issued to share allottees and they fail to respond to such notices, the onus shifts back on the assessee who becomes liable to addition u/s 68 and Whether the concept of 'shifting onus' means that after assessee provides certain details about the share allotees and the assessee's duty gets over. And the Revenue's appeal is upheld.

Facts of the case

Assessee, a private limited company had filed its return for AY 2004-05 declaring loss. Subsequentally its case was reopened u/s 148 and an assessment order was passed u/s 144/147 by which addition u/s 68 was made. On appeal, CIT(A) sought for a remand report and observed that the assessee had furnished all the relevant particulars of the share applicants who had invested in its company. These particulars included PAN details which revealed that the investors were filing income tax returns. The CIT(A) also concluded that during the course of remand proceedings the AO could not prove with certainty that the investors were entry providers and that the transactions entered by the assessee with them were bogus. It was also observed that the AO had not made any 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. Furthermore, the CIT(A) was of the opinion that no opportunity to cross-examine the deponents who had made statements during the course of investigation proceedings had been furnished. Thus, the adding back u/s 68 was directed to be set aside. On further appeal by the Revenue, the assessee had also filed cross objections on the ground that the reopening of assessment was unwarranted. The revenue's appeal was rejected by the Tribunal's order; the cross objections were held to be infructuous and dismissed. Tribunal had discussed about the SC in case of CIT v Lovely Exports and held that the assessee had provided the PAN and other documentary evidence to prove the identity and creditworthiness of the share applicants and the addition u/s 68 was not warranted. It was observed that when assessee had proved the identity of the share applicants by either furnishing their PAN number or income tax assessment number and shown the genuineness of transaction by showing money either by account payee cheque or by draft or by any other mode, then the onus of proof would shift to the revenue. In the present case, assessee had discharged its onus to prove the identity of the share applicants.

Before HC, the Revenue's counsel placed reliance upon the remand report called for by the CIT(A). It was argued that the remand report had clearly brought out that the assessee, a stock in share broker had not traded in any stocks and shares but shown interest income and dividend income on investments made by it and the loans and advances given by it to other parties. In such event, there was no necessity of raising such huge amount of share capital and year after year. It was also argued that the assessee continued to receive dividends upon its investments but had not paid dividends to the so-called shareholders from whom it received capital. Counsel relied on CIT v Divine Leasing and Finance Ltd (2006-TIOL-353-HC-DEL-IT), wherein it was observed that where the preponderance of evidence indicates absence of culpability and complexity of the assessed it should not be harassed by the Revenues insistence that it should prove the negative. In the case of a public issue, the Company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers. The Company must, however, maintain and make available to the AO for his perusal, all the information contained in the statutory share application documents. In the case of private placement the legal regime would not be the same. The burden of proof can seldom be discharged to the hilt by the assessed; if the AO harbours doubts of the legitimacy of any subscription he is empowered, nay duty-bound, to carry out thorough investigations. But if the AO fails to unearth any wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the Company.

On the other hand, the assessee's counsel contended that the CIT(A) and the ITAT had correctly deduced that the findings of the AO regarding unexplained income were unsustainable. It was emphasized that Lovely Exports had declared the law, in which it was stated that the initial onus lies on the assessee to discharge its source of income, which in this case was done, by furnishing the addresses and other details such as PAN particulars, list of directors, bank account particulars, etc of the share applicants, who were income tax payees. The burden of proving that the amounts received were unexplained income, or unaccounted money of the assessee, lay upon the revenue, which it had not discharge.

Having heard the matter, the High Court held that;

++ in some of the previous decisions it was held that the assessee cannot be faulted if the share applicants do not respond to summons, and that the state or revenue authorities have the wherewithal to compel anyone to attend legal proceedings. However, that is merely one aspect. An assessee’s duty to establish that the amounts which the AO proposes to add back, u/s 68 are properly sourced, does not cease by merely furnishing the names, addresses and PAN particulars, or relying on entries in a ROC website. One must remember that in all such cases, more often than not, the company is a private one, and share applicants are known to it, since they are issued on private placement, or even request basis. If the assessee has access to the share applicant’s PAN particulars, or bank account statement, surely its relationship is closer than arm’s length. Its request to such concerns to participate in income tax proceedings, would, viewed from a pragmatic perspective, be quite strong, because the next possible step for the tax administrators could well be reopening of such investor’s proceedings. That apart, the concept of “shifting onus” does not mean that once certain facts are provided, the assesse’s duties are over. If on verification, or during proceedings, the AO cannot contact the share applicants, or that the information becomes unverifiable, or there are further doubts in the pursuit of such details, the onus shifts back to the assessee. At that stage, if it falters, the consequence may well be an addition u/s 68;

++ in the case of A. Govindarajulu Mudaliar v CIT, it was held that whether a receipt is to be treated as income or not, must depend very largely on the facts and circumstances of each case. If 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 ITO 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 ITO 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. Having regard to the totality of facts and circumstances, particularly the remand report, which was not considered by the CIT(A) and the ITAT in its proper perspective, this Court is of the opinion that the question of law requires to be answered in favour of the revenue, and against the assessee.

(See 2012-TIOL-1056-HC-DEL-IT)