ajat wadhwa, fca 1 share capital & unsecured loans

Ajat Wadhwa, FCAAjat Wadhwa, FCA 11

SHARE CAPITAL SHARE CAPITAL &&

UNSECURED LOANS UNSECURED LOANS


THE RELEVANT PROVISIONTHE RELEVANT PROVISION SECTION 68 OF THE ACTSECTION 68 OF THE ACT Deeming provision-substantive –creates a Deeming provision-substantive –creates a

liability/chargeliability/charge Applicability whenApplicability when Credit of amount in books maintained by ‘A’Credit of amount in books maintained by ‘A’ Sum to be credited in previous yearSum to be credited in previous year ‘‘A’ offers no explanation about nature and A’ offers no explanation about nature and

source thereof source thereof ‘‘A’ offers explanation – not satisfactory in A’ offers explanation – not satisfactory in

opinion of AO.opinion of AO. The sum so credited may be charged…The sum so credited may be charged…


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


SHARE CAPITALSHARE CAPITAL

If share application through banking If share application through banking channel – Only identity need to be channel – Only identity need to be established established -- Barkha Synthetics 286 ITR 377 (Raj)Barkha Synthetics 286 ITR 377 (Raj)-- Stellar Investment 251 ITR 263 (SC)Stellar Investment 251 ITR 263 (SC)-- Divine Leasing 207 CTR 38 (Del)Divine Leasing 207 CTR 38 (Del)-- Glocom Impex 205 CTR 511 (Del) Glocom Impex 205 CTR 511 (Del)

- Makhni & Tyagi (P) Ltd – 136 Taxman - Makhni & Tyagi (P) Ltd – 136 Taxman 641(Del) & 641(Del) & 267 ITR 433, Avtantika 267 ITR 433, Avtantika Investment – 262 ITR Investment – 262 ITR 493(Del), Achal 493(Del), Achal Investment – 268 ITR 335(Del), Investment – 268 ITR 335(Del),


CIT v. Lovely Exports (P) Ltd. 216 CTR 195 (SC) – SLP DismissedCIT v. Lovely Exports (P) Ltd. 216 CTR 195 (SC) – SLP DismissedFrom Delhi High Court in case of Divine Leasing & Lovely Exports 299 From Delhi High Court in case of Divine Leasing & Lovely Exports 299 ITR 268. Dismissal of SLP through a speaking order.ITR 268. Dismissal of SLP through a speaking order.Even if the shareholders are bogus, the addition if any can be made in Even if the shareholders are bogus, the addition if any can be made in their hands only. Bogus according to the Oxford dictionary means their hands only. Bogus according to the Oxford dictionary means faked, fraudulent, sham, deceptive, misleading, forged, make believe, faked, fraudulent, sham, deceptive, misleading, forged, make believe, fictitious, dummy, phoney, pretend, etc.fictitious, dummy, phoney, pretend, etc.

In K. Mahim UDMA, 242 ITR 133 Ker- The essence of benami is the 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 intention of the parties, and often, such intention is shrouded in a secret veil which cannot be easily pieced through. But such difficulties secret veil which cannot be easily pieced through. But such difficulties do not relieve the person asserting the transaction to be benami of the 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 serious onus that rests on him, nor justify the acceptance of mere conjectures and surmises as a substitute for proof. It is not enough conjectures and surmises as a substitute for proof. It is not enough merely to show circumstances which might create suspicion because merely to show circumstances which might create suspicion because the court cannot decide on the basis of suspicion. It has to act on legal the court cannot decide on the basis of suspicion. It has to act on legal grounds established by evidence.grounds established by evidence.


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


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


No need for fresh opportunityNo need for fresh opportunity.. CIT v. Indocon Finance & Investment Ltd,1 DTR 25 (Del)CIT v. Indocon Finance & Investment Ltd,1 DTR 25 (Del)

Merely on the basis of a statement and without allowing Merely on the basis of a statement and without allowing an opportunity to cross examine the addition cannot be an opportunity to cross examine the addition cannot be sustained. The plea of the Revenue that the matter sustained. The plea of the Revenue that the matter should be remanded back to the file of the assessing should be remanded back to the file of the assessing officer to look into the issue afresh was not allowed on officer to look into the issue afresh was not allowed on the ground that this would not serve any purpose and the ground that this would not serve any purpose and would not only delay further proceedings but would also would not only delay further proceedings but would also cause further harassment to the assessee. It was further cause further harassment to the assessee. It was further stated that the revenue had an opportunity to justify its stated that the revenue had an opportunity to justify its stand but it failed to avail of that occasion. There is stand but it failed to avail of that occasion. There is therefore no reason why it should be given a second therefore no reason why it should be given a second chance. chance. This proposition has also been held by the Hon’ble This proposition has also been held by the Hon’ble Chandigarh Tribunal in the case of Neena Syal 70 ITD Chandigarh Tribunal in the case of Neena Syal 70 ITD 62. 62.


ALLEGATIONS OF BOGUS ALLEGATIONS OF BOGUS MONEY-REOPENING OF MONEY-REOPENING OF

ASSESSMENTASSESSMENT Nova Promoters FinleaseNova Promoters Finlease Statement regarding bogus companies and bank accounts.Statement regarding bogus companies and bank accounts. Affidavit filed by A confirming share capital. Gunwati Bai 146 ITR Affidavit filed by A confirming share capital. Gunwati Bai 146 ITR

140 Del –No material on record to doubt affidavit and no cross 140 Del –No material on record to doubt affidavit and no cross examination taken- affidavt to be true.examination taken- affidavt to be true.

Retraction after 3 years.Retraction after 3 years. Modus operandi graphic and names A.Modus operandi graphic and names A.

Sarthak Securities 329 ITR 110Sarthak Securities 329 ITR 110 Del-writ for questioning 148 notice- Del-writ for questioning 148 notice-received bogus accommodation entries - details, beneficiary received bogus accommodation entries - details, beneficiary name, beneficiary bank, beneficiary branch, value of entry, date of name, beneficiary bank, beneficiary branch, value of entry, date of entry, name of account holder giving entry, back from which entry entry, name of account holder giving entry, back from which entry given.-Accommodation entries received as unsecured loan. given.-Accommodation entries received as unsecured loan.

Held. AO aware of four companies – no mention that companies Held. AO aware of four companies – no mention that companies fictitious – no independent application of mind – existence not fictitious – no independent application of mind – existence not disputed – banking channels. Watered down by AGR Investments disputed – banking channels. Watered down by AGR Investments 50 DTR 97 Del.50 DTR 97 Del.


Proviso to Sec 68 w.e.f. 1-4-Proviso to Sec 68 w.e.f. 1-4-13 13

Applicable to companies in which public Applicable to companies in which public not interested.not interested.

In respect of share application, share In respect of share application, share premium, share capital or any such premium, share capital or any such amount received by the company.amount received by the company.

Explanation offered by company deemed Explanation offered by company deemed to be not satisfactory unless:to be not satisfactory unless:a. The shareholder offers explanation a. The shareholder offers explanation regarding nature and source of the sum.regarding nature and source of the sum.b. Such explanation found to be b. Such explanation found to be satisfactory.satisfactory.


Unsecured loansUnsecured loans Judge made law – Assessee to establish identity of Judge made law – Assessee to establish identity of

giver, genuineness of transaction and giver, genuineness of transaction and creditworthiness of giver.creditworthiness of giver.

Identity-PAN, ROI, Passport etcIdentity-PAN, ROI, Passport etc Genuineness-bank statement, confirmation, Genuineness-bank statement, confirmation,

relationship etc.relationship etc. Creditworthiness- assets list, robust return of income, Creditworthiness- assets list, robust return of income,

large credits in the bank.large credits in the bank. ONUS OF ‘A’ discharged once he files confirmation ONUS OF ‘A’ discharged once he files confirmation

with PAN ward, bank particulars and income source with PAN ward, bank particulars and income source of creditor. of creditor.

The rigors of section 68 are different in cases of gift, The rigors of section 68 are different in cases of gift, unsecured loans and share capital.unsecured loans and share capital.

Gift: Most strict-relationship, rigorous test of Gift: Most strict-relationship, rigorous test of creditworthiness. Mohan akala 291 ITR 278 SC. creditworthiness. Mohan akala 291 ITR 278 SC.


1.1. Assessee ‘offers no explanation’ means no Assessee ‘offers no explanation’ means no proper, reasonable and acceptable explanation proper, reasonable and acceptable explanation

2.2. Sumiti Dayal 214 ITR 801 (SC) – Receipt of Sumiti Dayal 214 ITR 801 (SC) – Receipt of money is prima facie evidence against “A”.money is prima facie evidence against “A”.

3. Daulat Ram Rawatmull 87 ITR 349 SC3. Daulat Ram Rawatmull 87 ITR 349 SC OD taken by assessee firm-security FD of OD taken by assessee firm-security FD of

partners son-deposits adjusted OD.partners son-deposits adjusted OD. Onus of apparent was not real on who alleges-to Onus of apparent was not real on who alleges-to

be direct nexus between conclusion of fact and be direct nexus between conclusion of fact and primary fact on which conclusion based.primary fact on which conclusion based.

Extraneous and irrelevant consideration-same Extraneous and irrelevant consideration-same bank-no consideration-owner not properly bank-no consideration-owner not properly explained source of deposit doesn’t mean it explained source of deposit doesn’t mean it belonged to assessee.belonged to assessee.


Orissa Corporation 159 ITR 78 SC.Orissa Corporation 159 ITR 78 SC. Kalyan Memorial 125 ITD 525 Agra TM-’A’ Kalyan Memorial 125 ITD 525 Agra TM-’A’

filed confirmation PAN etc – summons by filed confirmation PAN etc – summons by AO to creditors returned and AO asked ‘A’ AO to creditors returned and AO asked ‘A’ to substantiate-never asked ‘a’ to produce to substantiate-never asked ‘a’ to produce creditor-AO could have verified from PAN creditor-AO could have verified from PAN or bank account-no addition.or bank account-no addition.

Golden Remedies 18 SOT 260 Del-Golden Remedies 18 SOT 260 Del- Rohini Builders 76 TTJ 521 Ahd-TDS on Rohini Builders 76 TTJ 521 Ahd-TDS on

interest paid-PAN given-merely because interest paid-PAN given-merely because summons returned-no addition can be summons returned-no addition can be made.made.


EXAMINATION OF THE SOURCE EXAMINATION OF THE SOURCE OF SOURCEOF SOURCE

BASIC JUDGEMENT- TOLA RAM DAGA 59 ITR 632.BASIC JUDGEMENT- TOLA RAM DAGA 59 ITR 632. if third party confirms her deposit then ‘A’ can’t be compelled to 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 establish the source of her deposit. Section 34 of the Evidence Act says that entries in books of account to be true.says that entries in books of account to be true.

Even if the deposit is from wife - ‘A’ not presumed to have private Even if the deposit is from wife - ‘A’ not presumed to have private knowledge of the source unless Deptt establishes that he had knowledge of the source unless Deptt establishes that he had knowledge.knowledge.Also Orient Trading Co 49 ITR 723 Bom, S Hastimal 49 ITR 273 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 MAD, Nabadwip Chandra Roy 44 ITR 591 ASSAM, S N Ganguly 24 ITR 16 PAT.ITR 16 PAT.

Judgement in KALE KHAN HANIF distinguished as deposits were of Judgement in KALE KHAN HANIF distinguished as deposits were of ‘A’ not third party.‘A’ not third party.

ARAVALI TRADING 220 CTR 622 RAJ- Two out of four creditorsARAVALI TRADING 220 CTR 622 RAJ- Two out of four creditors appeared but all confirmed having given loans-also filed evidence appeared but all confirmed having given loans-also filed evidence

ofof source- source of creditors found weak and unacceptable-held nosource- source of creditors found weak and unacceptable-held no nexus between money given by creditors and assessee found-addn nexus between money given by creditors and assessee found-addn

if if any to be in hands of creditors.any to be in hands of creditors.


CONTINUEDCONTINUED

Late Mangilal Agarwal 300 ITR 372 RAJLate Mangilal Agarwal 300 ITR 372 RAJ.- No .- No statutory presumption of ownership against ‘A’-if statutory presumption of ownership against ‘A’-if he disclaims ownership, burden on Department-he disclaims ownership, burden on Department-primary gold found-owners not able to furnish primary gold found-owners not able to furnish evidence/discrepancy in explanation.evidence/discrepancy in explanation.Nemi Chand KothariNemi Chand Kothari – 264 ITR 254(Gau) Cr – 264 ITR 254(Gau) Cr didn’t show Cr worthiness of sub-Cr- Addn not didn’t show Cr worthiness of sub-Cr- Addn not justified in hands of ‘A’ – - justified in hands of ‘A’ – -

Sarogi Credit Corporation 103 ITR 344 Pat-Sarogi Credit Corporation 103 ITR 344 Pat- Once identity established and pledged on oath- Once identity established and pledged on oath- burden on Department to show that money in burden on Department to show that money in fact belongs to the ‘A’.-rejection of source of fact belongs to the ‘A’.-rejection of source of creditor by itself won’t lead to addition.creditor by itself won’t lead to addition.


Request for SummonsRequest for Summons AO duty bound to issue summons on request & AO duty bound to issue summons on request &

enforce attendance 54 ITD 229 (Del), enforce attendance 54 ITD 229 (Del), Munna Lal Murli Dhar 79 ITR 540 (All), inadequate Munna Lal Murli Dhar 79 ITR 540 (All), inadequate

opportunity and not acceding to request to opportunity and not acceding to request to summon-asstt vitiated.summon-asstt vitiated.

Others - 117 ITR 186 (All) CIT v. Randhenu Others - 117 ITR 186 (All) CIT v. Randhenu Vyapar Co. 263 ITR 692 (Cal). Vyapar Co. 263 ITR 692 (Cal).

Assessee tried best – took dasti summons – could Assessee tried best – took dasti summons – could not enforce attendance no adverse inference – not enforce attendance no adverse inference – summons to be directly issued by AO – must summons to be directly issued by AO – must enforce attendance – Nathuram Prem Chand v. enforce attendance – Nathuram Prem Chand v. CIT 49 ITR 561 (All).CIT 49 ITR 561 (All).

EMC Works Pvt ltd 49 ITR 640 (All)-Duty of AO to EMC Works Pvt ltd 49 ITR 640 (All)-Duty of AO to requisition books from Police if the “A’ makes a requisition books from Police if the “A’ makes a request-otherwise asstt process vitiated.request-otherwise asstt process vitiated.


SUMMONS CONTINUED AND OLD SUMMONS CONTINUED AND OLD LOANSLOANS

Hanuman Agarwal 151 ITR 150 Pat.Hanuman Agarwal 151 ITR 150 Pat. Name ,address, PAN and confirmatory letter-onus Name ,address, PAN and confirmatory letter-onus

shifts to Dept-unless 131 issued by AO-assessee is to shifts to Dept-unless 131 issued by AO-assessee is to succeed-source of income is in exclusive domain/dark succeed-source of income is in exclusive domain/dark trusses of the minds.trusses of the minds.Orissa Corporation 159 ITR 78 SC.Orissa Corporation 159 ITR 78 SC.

Names addresses and PAN given-couldn’t produce and Names addresses and PAN given-couldn’t produce and requested for summons-deptt didn’t pursue creditors requested for summons-deptt didn’t pursue creditors and only issued summons.and only issued summons.

––After 20 yrs from the event, lenders can’t be After 20 yrs from the event, lenders can’t be excepted to prove genuineness. Champaklal excepted to prove genuineness. Champaklal Dhamanwala 34 ITD 209(Ahd), R.N. Goel 49 TTJ Dhamanwala 34 ITD 209(Ahd), R.N. Goel 49 TTJ 251(Del), 251(Del),

Jindal Udyog – 83 ITD 248(Chd), May charge to tax-P.K. Jindal Udyog – 83 ITD 248(Chd), May charge to tax-P.K. Noorjehan 237 ITR 570(SC)-after 10 years can’t be Noorjehan 237 ITR 570(SC)-after 10 years can’t be said that irregularity is of “a’ doing.said that irregularity is of “a’ doing.


Evidence to be confronted-ask Evidence to be confronted-ask for cross examinationfor cross examination

Addn on basis of report of Institute on percentage of Addn on basis of report of Institute on percentage of silver-chewing tobaccosilver-chewing tobacco

Request to AO for cross examination not acceded to-Request to AO for cross examination not acceded to-principles of natural justice flouted – Dharam Pal 295 principles of natural justice flouted – Dharam Pal 295 ITR 105 DelITR 105 Del

Rajesh Kumar 218 CTR 691 Del, 177 ITR 108 (Del)Rajesh Kumar 218 CTR 691 Del, 177 ITR 108 (Del) Pradeep Kumar Gupta 303 ITR 95, Delhi- Failure to Pradeep Kumar Gupta 303 ITR 95, Delhi- Failure to

produce the third-party who was purportedly the produce the third-party who was purportedly the entry provider for cross-examination despite request entry provider for cross-examination despite request of the assessee was fatal to the assessment itself. of the assessee was fatal to the assessment itself.

Evidence to be confronted 239 ITR 859 (P&H), Evidence to be confronted 239 ITR 859 (P&H), Ponkunnam 102 ITR 366 (Ker) ACIT v. Surya Kant Ponkunnam 102 ITR 366 (Ker) ACIT v. Surya Kant Dalmi 99 TTJ 27 – SB (Cal), Nahta 301 ITR 134 (MP), Dalmi 99 TTJ 27 – SB (Cal), Nahta 301 ITR 134 (MP), 12 DTR 293 Mad, Jindal Vegetable 315 ITR 265 Del, 12 DTR 293 Mad, Jindal Vegetable 315 ITR 265 Del, Goverdhan India 177 TAXMAN 29 Del. Goverdhan India 177 TAXMAN 29 Del.


MiscMisc

No addition merely on third party No addition merely on third party statementstatement; ;

CIT v. Girish Chaudhary 296ITR 619 (Del) Rajesh CIT v. Girish Chaudhary 296ITR 619 (Del) Rajesh Jain 100 TTJ 929 (Del) Bansal Strips (P) Ltd.100 Jain 100 TTJ 929 (Del) Bansal Strips (P) Ltd.100 TTJ 665 Prarthana Construction 70 TTJ 122 (Ahd) TTJ 665 Prarthana Construction 70 TTJ 122 (Ahd) Third Party Statement 100 TTJ 665 (Del) 303 ITR Third Party Statement 100 TTJ 665 (Del) 303 ITR 95 del, 20 DTR 317 Del, 288 ITR 345 Del, 304 95 del, 20 DTR 317 Del, 288 ITR 345 Del, 304 ITR 393 Del, 25 DTR 97 Del.ITR 393 Del, 25 DTR 97 Del.

Addition of cash sales u/s 68 for non furnishing Addition of cash sales u/s 68 for non furnishing of buyers names. R B Jessavam Fatehchand v of buyers names. R B Jessavam Fatehchand v CIT 75 ITR 33 ( Bom)CIT 75 ITR 33 ( Bom)

Realisation of Sundry Debtors – Not cash credit – Realisation of Sundry Debtors – Not cash credit – 55 ITD 159 (Del)55 ITD 159 (Del)

ajat wadhwa, fca 1 share capital & unsecured loans

Documents

books of accounts

itr at001 maintenance

ajat wadhwa

previous year sum

offers explanation

books of original entry

achal investment

avtantika investment