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SHARE CAPITAL & UNSECURED LOANS

SHARE CAPITAL & UNSECURED LOANS . THE RELEVANT PROVISION. SECTION 68 OF THE ACT Deeming provision-substantive –creates a liability/charge Applicability when Credit of amount in books maintained by ‘A’ Sum to be credited in previous year

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SHARE CAPITAL & UNSECURED LOANS

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  1. SHARE CAPITAL & UNSECURED LOANS Ajat Wadhwa, FCA

  2. THE RELEVANT PROVISION • SECTION 68 OF THE ACT • Deeming provision-substantive –creates a liability/charge • Applicability when • Credit of amount in books maintained by ‘A’ • Sum to be credited in previous year • ‘A’ offers no explanation about nature and source thereof • ‘A’ offers explanation – not satisfactory in opinion of AO. • The sum so credited may be charged… Ajat Wadhwa, FCA

  3. Found credited in the books of an assessee maintained for any previous year • Where amounts not credited in books of accounts? • Held that amount not credited in books of accounts cannot be brought to tax u/s 68. Baladin Ram vs. CIT (71 ITR 427) (SC) • Meaning of books of accounts-sec.2[12A] • refer to books of original entry, wherein accounts are updated/entries made in routine basis regularly. Also refer CBI v. V. C. Shukla [1998] 3 SCC 410 • Credits of earlier years, not surfacing in current year,are outside the scope of section 68. • Credits on first day of the previous year, can well be examined u/s68. • Credits on first day of new business of firm, can only be examined in the hands of the partners. • Credits in pass book provided by bank.Passbook is not books of account.CITvs. BhaichandH Gandhi (141 ITR 67)(Bom)-adverse view of ITAT Delhi in 314 ITR [AT]001 • Maintenance of books of account is a condition precedent for application of section 68-86 ITD 626 (Del.Trib) DCIT v/sFinlayCorporation Ajat Wadhwa, FCA

  4. SHARE CAPITAL If share application through banking channel – Only identity need to be established - Barkha Synthetics 286 ITR 377 (Raj) - Stellar Investment 251 ITR 263 (SC)- Divine Leasing 207 CTR 38 (Del) - Glocom Impex 205 CTR 511 (Del) - Makhni & Tyagi (P) Ltd – 136 Taxman 641(Del) & 267 ITR 433, Avtantika Investment – 262 ITR 493(Del), Achal Investment – 268 ITR 335(Del), Ajat Wadhwa, FCA

  5. CIT v. Lovely Exports (P) Ltd. 216 CTR 195 (SC) – SLP Dismissed From Delhi High Court in case of Divine Leasing & Lovely Exports 299 ITR 268. Dismissal of SLP through a speaking order. Even if the shareholders are bogus, the addition if any can be made in their hands only. Bogus according to the Oxford dictionary means faked, fraudulent, sham, deceptive, misleading, forged, make believe, fictitious, dummy, phoney, pretend, etc. • In K. Mahim UDMA, 242 ITR 133 Ker- The essence of benami is the intention of the parties, and often, such intention is shrouded in a secret veil which cannot be easily pieced through. But such difficulties do not relieve the person asserting the transaction to be benami of the serious onus that rests on him, nor justify the acceptance of mere conjectures and surmises as a substitute for proof. It is not enough merely to show circumstances which might create suspicion because the court cannot decide on the basis of suspicion. It has to act on legal grounds established by evidence. Ajat Wadhwa, FCA

  6. CASE LAWS Venkateshwar Ispat P.Ltd, (2009)319 ITR 393 (Chhattisgarh) Letters issued to the shareholders returned unserved- address is not complete or for other similar reason. Additional evidence in the form of confirmations etc filed by the A was accepted by the CIT (A). Bhav Shakti Steel Mines (P) Ltd, 18 DTR 194 (Del) Cash deposits in the bank accounts of the shareholders out of which cheques were issued to the appellant company. The tribunal set-aside the order of the CIT(A) with the direction that the share applicant should be examined. The Hon’ble High Court allowed the appellant's appeal by stating that the identity of each of the shareholders stood established, each of them is an income tax assessee and had disclosed the share application money in their accounts Gangour Investment Ltd, [2009] 18 DTR 242 (Del) the allegation that it was the appellant's own money which was brought back as share capital was found to be baseless, unsubstantiated and relying upon the judgement of the Hon’ble Supreme Court in the case of lovely exports, the appeal of the department was dismissed. Ajat Wadhwa, FCA

  7. CIT v. Samir BIO-Tech (P) Ltd, 17 DTR 224 ( Del ) there was no response of the shareholders to the summons issued by the Department. No adverse inference only because the subscribers did not initially respond to the summons. The subsequent confirmation letters filed are sufficient and the identity of the subscribers stands establish coupled with the fact that they have shown the said amounts in their audited balance sheet filed before the IT authorities. • GP International Ltd. (2009) 186 Taxman 229 (P&H) Merely because there was no response to notices under section 136(6) no conclusion that the share capital is in genuine can be drawn. Value Capital Services Private limited 307 ITR 334- additional burden on the revenue whereby it must show that even if the applicant does not have the means to make the investment, the investment made by the applicant actually emanated from the coffers of the ‘A’. Victor Electrodes 329 ITR 271 Delhi- no need for production. Hindustan Inks and Resins 60 DTR 18 Gujarat Ajat Wadhwa, FCA

  8. No need for fresh opportunity. • CIT v. Indocon Finance & Investment Ltd,1 DTR 25 (Del) Merely on the basis of a statement and without allowing an opportunity to cross examine the addition cannot be sustained. The plea of the Revenue that the matter should be remanded back to the file of the assessing officer to look into the issue afresh was not allowed on the ground that this would not serve any purpose and would not only delay further proceedings but would also cause further harassment to the assessee. It was further stated that the revenue had an opportunity to justify its stand but it failed to avail of that occasion. There is therefore no reason why it should be given a second chance. This proposition has also been held by the Hon’ble Chandigarh Tribunal in the case of Neena Syal 70 ITD 62. Ajat Wadhwa, FCA

  9. ALLEGATIONS OF BOGUS MONEY-REOPENING OF ASSESSMENT • Nova Promoters Finlease • Statement regarding bogus companies and bank accounts. • Affidavit filed by A confirming share capital. Gunwati Bai 146 ITR 140 Del –No material on record to doubt affidavit and no cross examination taken- affidavt to be true. • Retraction after 3 years. • Modus operandi graphic and names A. • Sarthak Securities 329 ITR 110 Del-writ for questioning 148 notice-received bogus accommodation entries - details, beneficiary name, beneficiary bank, beneficiary branch, value of entry, date of entry, name of account holder giving entry, back from which entry given.-Accommodation entries received as unsecured loan. • Held. AO aware of four companies – no mention that companies fictitious – no independent application of mind – existence not disputed – banking channels. Watered down by AGR Investments 50 DTR 97 Del. Ajat Wadhwa, FCA

  10. Proviso to Sec 68 w.e.f. 1-4-13 • Applicable to companies in which public not interested. • In respect of share application, share premium, share capital or any such amount received by the company. • Explanation offered by company deemed to be not satisfactory unless: a. The shareholder offers explanation regarding nature and source of the sum. b. Such explanation found to be satisfactory. Ajat Wadhwa, FCA

  11. Unsecured loans • Judge made law – Assessee to establish identity of giver, genuineness of transaction and creditworthiness of giver. • Identity-PAN, ROI, Passport etc • Genuineness-bank statement, confirmation, relationship etc. • Creditworthiness- assets list, robust return of income, large credits in the bank. • ONUS OF ‘A’ discharged once he files confirmation with PAN ward, bank particulars and income source of creditor. • The rigors of section 68 are different in cases of gift, unsecured loans and share capital. • Gift: Most strict-relationship, rigorous test of creditworthiness. Mohan akala 291 ITR 278 SC. Ajat Wadhwa, FCA

  12. 1. Assessee ‘offers no explanation’ means no proper, reasonable and acceptable explanation • 2. Sumiti Dayal 214 ITR 801 (SC) – Receipt of money is prima facie evidence against “A”. • 3. Daulat Ram Rawatmull 87 ITR 349 SC • OD taken by assessee firm-security FD of partners son-deposits adjusted OD. • Onus of apparent was not real on who alleges-to be direct nexus between conclusion of fact and primary fact on which conclusion based. • Extraneous and irrelevant consideration-same bank-no consideration-owner not properly explained source of deposit doesn’t mean it belonged to assessee. Ajat Wadhwa, FCA

  13. Orissa Corporation 159 ITR 78 SC. • Kalyan Memorial 125 ITD 525 Agra TM-’A’ filed confirmation PAN etc – summons by AO to creditors returned and AO asked ‘A’ to substantiate-never asked ‘a’ to produce creditor-AO could have verified from PAN or bank account-no addition. • Golden Remedies 18 SOT 260 Del- • Rohini Builders 76 TTJ 521 Ahd-TDS on interest paid-PAN given-merely because summons returned-no addition can be made. Ajat Wadhwa, FCA

  14. EXAMINATION OF THE SOURCE OF SOURCE • BASIC JUDGEMENT- TOLA RAM DAGA 59 ITR 632. • if third party confirms her deposit then ‘A’ can’t be compelled to establish the source of her deposit. Section 34 of the Evidence Act says that entries in books of account to be true. • Even if the deposit is from wife - ‘A’ not presumed to have private knowledge of the source unless Deptt establishes that he had knowledge. Also Orient Trading Co 49 ITR 723 Bom, S Hastimal 49 ITR 273 MAD, Nabadwip Chandra Roy 44 ITR 591 ASSAM, S N Ganguly 24 ITR 16 PAT. • Judgement in KALE KHAN HANIF distinguished as deposits were of ‘A’ not third party. ARAVALI TRADING 220 CTR 622 RAJ- Two out of four creditors appeared but all confirmed having given loans-also filed evidence of source- source of creditors found weak and unacceptable-held no nexus between money given by creditors and assessee found-addn if any to be in hands of creditors. Ajat Wadhwa, FCA

  15. CONTINUED Late Mangilal Agarwal 300 ITR 372 RAJ.- No statutory presumption of ownership against ‘A’-if he disclaims ownership, burden on Department-primary gold found-owners not able to furnish evidence/discrepancy in explanation. Nemi Chand Kothari – 264 ITR 254(Gau) Cr didn’t show Cr worthiness of sub-Cr- Addn not justified in hands of ‘A’ – - Sarogi Credit Corporation 103 ITR 344 Pat- Once identity established and pledged on oath- burden on Department to show that money in fact belongs to the ‘A’.-rejection of source of creditor by itself won’t lead to addition. Ajat Wadhwa, FCA

  16. Request for Summons • AO duty bound to issue summons on request & enforce attendance 54 ITD 229 (Del), • Munna Lal Murli Dhar 79 ITR 540 (All), inadequate opportunity and not acceding to request to summon-asstt vitiated. • Others - 117 ITR 186 (All) CIT v. Randhenu Vyapar Co. 263 ITR 692 (Cal). • Assessee tried best – took dasti summons – could not enforce attendance no adverse inference – summons to be directly issued by AO – must enforce attendance – Nathuram Prem Chand v. CIT 49 ITR 561 (All). • EMC Works Pvt ltd 49 ITR 640 (All)-Duty of AO to requisition books from Police if the “A’ makes a request-otherwise asstt process vitiated. Ajat Wadhwa, FCA

  17. SUMMONS CONTINUED AND OLD LOANS • Hanuman Agarwal 151 ITR 150 Pat. • Name ,address, PAN and confirmatory letter-onus shifts to Dept-unless 131 issued by AO-assessee is to succeed-source of income is in exclusive domain/dark trusses of the minds. Orissa Corporation 159 ITR 78 SC. • Names addresses and PAN given-couldn’t produce and requested for summons-deptt didn’t pursue creditors and only issued summons. • –After 20 yrs from the event, lenders can’t be excepted to prove genuineness. Champaklal Dhamanwala 34 ITD 209(Ahd), R.N. Goel 49 TTJ 251(Del), • Jindal Udyog – 83 ITD 248(Chd), May charge to tax-P.K. Noorjehan 237 ITR 570(SC)-after 10 years can’t be said that irregularity is of “a’ doing. Ajat Wadhwa, FCA

  18. Evidence to be confronted-ask for cross examination • Addn on basis of report of Institute on percentage of silver-chewing tobacco • Request to AO for cross examination not acceded to-principles of natural justice flouted – Dharam Pal 295 ITR 105 Del • Rajesh Kumar 218 CTR 691 Del, 177 ITR 108 (Del) • Pradeep Kumar Gupta 303 ITR 95, Delhi- Failure to produce the third-party who was purportedly the entry provider for cross-examination despite request of the assessee was fatal to the assessment itself. • Evidence to be confronted 239 ITR 859 (P&H), Ponkunnam 102 ITR 366 (Ker) ACIT v. Surya Kant Dalmi 99 TTJ 27 – SB (Cal), Nahta 301 ITR 134 (MP), 12 DTR 293 Mad, Jindal Vegetable 315 ITR 265 Del, Goverdhan India 177 TAXMAN 29 Del. Ajat Wadhwa, FCA

  19. Misc • No addition merely on third party statement; • CIT v. Girish Chaudhary 296ITR 619 (Del) Rajesh Jain 100 TTJ 929 (Del) Bansal Strips (P) Ltd.100 TTJ 665 Prarthana Construction 70 TTJ 122 (Ahd) Third Party Statement 100 TTJ 665 (Del) 303 ITR 95 del, 20 DTR 317 Del, 288 ITR 345 Del, 304 ITR 393 Del, 25 DTR 97 Del. • Addition of cash sales u/s 68 for non furnishing of buyers names. R B Jessavam Fatehchand v CIT 75 ITR 33 ( Bom) • Realisation of Sundry Debtors – Not cash credit – 55 ITD 159 (Del) Ajat Wadhwa, FCA

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