By TIOL News Service

NEW DELHI, DEC 20, 2013: THE issue before the Bench is - Whether share application form is unimpeachable document, and the same can be considered for cross-verification of the transaction of share transfer. And the verdict goes against the assessee.

Facts of the case

The assessee, a company, had filed return on 31.10.2001 declaring total income of Rs. 1,42,508/-. Its assessment was completed u/s 143(3) at income of Rs. 8,90,160/-. On giving appeal effect, the revised income stood assessed at Rs.8,64,414/-. As per the Investigation Wing, Assessee was identified as one of the beneficiaries who had received bogus entries. Notice u/s 148 was issued, in response to which, assessee filed a letter stating that return originally filed may be treated as return in response to the notice u/s 148. Notice u/s 143(2) & 142(1) was issued and assessee was required to furnish information in respect of persons who had been allotted shares between the period 31.03.2001 and 31.03.2007. The notice was not complied with and a second notice was issued again, which was also not complied with. Instead, the Assessee vide a letter challenged the validity and legality of the action taken u/s 147 and 148. The objections raised by the assessee against the notice u/s 148 were rejected by the assessee. Subsequentally assessee filed confirmation from the respective persons who had subscribed to the share capital. Assessee was directed to prove the creditworthiness in respect of the parties from whom share application money had been received during the FY 2000-01. Assessee requested for and was provided the photocopies of the extracts of the bank statements which were filed by the Assessee during the course of original assessment proceedings. On 24.12.2007, a request for adjournment was made on behalf of assessee to 27.12.2007. As even after ajournment, no one appearedon behalf of assessee, therefore assessment was made on the basis of details filed by assessee, inquiries made by the AO and details available in the original assessment records.

During assessment, AO noticed that the extracts of bank accounts submitted by assessee had been fabricated. AO had requisitioned the bank statements from the banks which established that immediately before the issuance of cheques for the purpose of making pay order or demand draft, there was a deposit of cash. Thus, AO noticed that the bank statement furnished during the original assessment proceedings was fabricated and misled AO in as much as it omitted to show the deposit of cash immediately prior to issuance of cheques for preparation of pay orders or DDs in favour of the Assessee regarding subscription of its share capital. AO found that assessee had adopted unfair practice by adducing false evidence to get undue advantage of giving colour of genuineness to bogus entries through fabricated bank accounts. AO found that the deposits were mostly by cash or transfer entries from the same bank of the entry providers. The AO held that there were facilitating accounts which showed transfer entries from one account to another to avoid direct reflection of deposits/withdrawal of cash. Further that the Assessee had received accommodation entries to launder unaccounted money in the shape of subscription to its share capital. The transactions in the bank accounts showed that there was a corresponding withdrawal of the amount in cash on the very same day of the crediting of cheques and there was immediate issuance of cheques/DDs on deposit of cash and simultaneously, they were facilitating accounts which showed transfer entries from one account to the other to avoid direct reflection of deposit/withdrawal of cash. AO held that the said companies had no creditworthiness, financial worth or regular resources to justify their subscription of share capital money. It was held that assessee had failed to discharge the onus to prove the creditworthiness of the said investors in terms of Section 68.

On appeal, CIT(A) had eleted the addition made by AO. CIT(A) had accepted the contention of Assessee that once the share applicants were identified, there could not be any addition u/s 68 in the hands of recipient company even if the share applicants/share holders were bogus and the other parameters i.e. creditworthiness and genuineness of transaction were not required to be fulfilled in respect of share application money/share capital once identity was established. It was held that Assessee had filed confirmation letters which contained the addresses, PAN numbers and other details and that Assessee had discharged its burden on proving basic details that were required for verification to fulfill the conditions i.e. identity of creditors, creditworthiness of creditors and genuineness of transactions. The CIT(A) held that AO had not verified the details or the IT records of the investors. The CIT(A) held that the Assessee had provided the necessary details and discharged the onus cast on it. With regard to the discrepancy between the bank accounts maintained by the share applicants and the copy of the bank accounts furnished, it was held that it was a case of reopening of assessment of the share applicants. CIT(A) held that assessee could not be penalized for mistakes/faults committed by the share applicants and that the AO had not found any discrepancy in the bank accounts maintained by assessee. The CIT (A) had directed the AO to reopen assessment of the said two share applicants to bring to tax the deposits made in their respective bank accounts. The CIT (A) accordingly deleted the addition made of Rs.34,50,000/-. On further appeal, Tribunal had dismissed Revenue's contentions and observed that SC in the case of CIT vs. Lovely Exports P. Ltd. (2008-TIOL-238-SC-IT), had held that since in the present case details of all persons from whom the share application money was received were furnished alongwith PANs, account details, share application forms and also confirmation letters and bank accounts, the addition could not be made in the hands of the Assessee by invoking provisions of Section 68. ITAT confirmed the findings of the CIT (Appeals).

Held that,

++ we are of the considered opinion that the orders of the CIT (Appeals) and the ITAT in deleting the additions made by the AO u/s 68 are perverse and are clearly unsustainable. Recently in the case of CIT VS NR PORTFOLIO PVT. LTD (2013-TIOL-955-HC-DEL-IT) we have held that mere production of PAN Number or assessment particulars does not establish the identity of a person. The identification of a person includes the place of work, the staff and the fact that it was actually carrying on business and further recognition of the said company/individual in the eyes of public. We have further noticed that PAN Numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertainment of the active nature of business activity. PAN Number is allotted as a facility to revenue to keep track of transactions. The PAN Number cannot be blindly and without consideration of surrounding circumstances treated as sufficiently disclosing the identity of the individual;

++ following CIT VS NOVA PROMOTERS AND FINLEASE PRIVATE LIMITED CASE (2012-TIOL-148-HC-DEL-IT) we have held that in view of the link between the entry providers and incriminating evidence, mere filing of PAN Number, acknowledgement of Income Tax Returns of the entry providers, bank account statement is not sufficient to discharge the onus on the Assessee. We have further held that the Court or Tribunal should be convinced about the identity, creditworthiness and genuineness of the transactions. The onus to prove the three factum is on the Assessee as the facts are within the personal knowledge of the Assessee. Mere production of incorporation details, PAN Numbers or income tax returns may not be sufficient when surrounding and attending facts predicate a cover up. The production of incorporation details, PAN numbers or income tax details may indicate towards completion of paper work or documentation but genuineness, creditworthiness and identity of investment and the investors are deeper and obtrusive than mere completion of paper work or documentation;

++ as we have held that PAN Numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertainment of the active nature of business activity. PAN Number is allotted as a facility to revenue to keep track of transactions. The PAN Number cannot be blindly and without consideration of surrounding circumstances treated as sufficiently disclosing the identity of the individual. The mere filing of share application is not enough as the said application is not an unimpeachable document and does not on its own prove the genuineness or authenticity of the transaction. It can at best be treated as a corroborative document. Since the share application form is not an unimpeachable document, it cannot on its own be treated as sufficient for cross-verification of the transaction. We have already held that that mere production of PAN Number or assessment particulars does not establish the identity of a person;

++ we are of the considered opinion that Assessee has not been able to discharge the initial onus and has not been able to establish the identity, creditworthiness of the share applicants and the genuineness of the transaction. The surrounding circumstances and inquiries made by AO were significant but the said finding though not disturbed have been ignored. Further the Tribunal has failed to take holistic view and has relied upon neutral and general evidence without noticing other evidence. Thus, we are of the view that the Assessee has not discharged the onus satisfactorily and the additions made by the Assessing Officer was justified and sustainable and the order of the Tribunal ignoring and nor dealing with the factual findings recorded by the assessing officer is perverse. The substantial question of law is thus answered in favour of the Appellant/Revenue and against the Respondent/Assessee. The appeal is accordingly allowed with costs that are assessed at Rs. 20,000/-.

(See 2013-TIOL-1057-HC-DEL-IT)