I-T - Whether doctrine of 'source of source' and 'origin of origin' can be applied universally - NO, not without reference to factual matrix: Delhi HC

I-T - Whether doctrine of 'source of source' and 'origin of origin' can be applied universally - NO, not without reference to factual matrix: Delhi HC

THE issues before the Bench are - Whether it is the duty of Revenue to adduce evidence to show from what source, income is derived; Whether submission of PAN is a sufficient compliance of proving genuineness of an assessee; Whether the doctrine of "source of source" and "origin of origin" can be applied universally and Whether creditworthiness of an assessee can be proved by mere issue of a cheque or by furnishing a copy of
statement of bank account. And the verdict goes in favour of Revenue.

Facts of the case

Assessee, a private limited company, had filed ROI for AY 2002-03 and 2003-04 declaring income of Rs.11,566/- and 18,720/-, which were processed u/s 143(1). Subsequently, reassessment proceedings were initiated on the basis of information received from the Investigation Wing that the assessee was one of the beneficiaries, who had procured share application money from entry providers. Notices for reassessment were received back unserved and subsequently were served by affixture at the address given in the returns. The assessee, however, did not appear in response to the said notices. Thus, the AO issued a show cause notice u/s 144, which was also returned unserved with the remark “no such firm”. Assessee again was served through affixture. On examining the return for the AY 2004-05, office of Chartered Accountant of assessee was contacted and thereupon they filed their POA. The said CAs also filed a letter that the assessee company had not received any notice and had been regularly filing their returns mentioning the correct address and after that there was change in address, the same was informed. Along with this letter, no detail of new address was filed. Another show cause notice was issued and sent at the last known address of assessee and the address of the CAs fixing the hearing. The letter referred to the notice u/s 147/148, show cause notice u/s 144 and the fact that the reasons could be provided only after ROI was filed but yet in the interest of justice and for the purpose of proceedings it was stated that as per information available, the share capital was received during the years from the persons who had been identified as entry operators. Thus, assessee had received accommodation entries covered u/s 68 as unexplained cash credit. This time also, no one appeared at the time of hearing. Subsequently, a request for adjournment was received by way of courier from CAs and they were allowed time, but on the said date also, no one appeared and no written request was received. Accordingly, ex-parte assessment orders were passed for the two AYs.

On appeal before CIT(A), assessee substantially succeeded on merits but did not succeed in their challenge to reopening u/s 147/148 or on the question of service of notice. Two cross appeals were preferred before the tribunal for the two AYs but the same had been dismissed, on the basis that assessee had furnished PAN of the share applicants except with regard to the share capital of Rs.4,50,000/- and before CIT(A), assessee had also submitted various details and documents to establish identity of the investors/share applicants. Thereafter, it was recorded that the tribunal had gone through various reasons and principles on which CIT(A) had deleted the addition. CIT(A) had given a finding that verification of PAN was made and found to be correct except with regard to the share application money of Rs.4,50,000/- and, therefore, in the light of the judgments of Delhi HC in CIT v. Lovely Exports Private Ltd. [2008] 299 ITR 268, Winstral Petrochemicals Pvt. Ltd. (2010-TIOL-353-HC-DEL-IT) and CIT Vs. Dwarkadhish Investment (P) Ltd. (2010-TIOL-617-HC-DEL-IT) and other cases, addition was not justified and not in accordance with law. Cross objections filed by the assessee were not pressed and it was specifically recorded that the validity of notice u/s 148 was not argued by assessee and it was fairly accepted that the assessee's appeals had no merit. The tribunal thereafter held that they had gone through the order of CIT(A) and the findings recorded on the said issue were right. Other findings recorded by CIT(A) refers to the remand report which was called from AO stating that notice u/s 148 was sent at the last known address which was also mentioned in the ROI, but was received unserved with the remark “no such assessee”, but subsequently served through affixture at the address which was shown in the ROI for the AY 2004-05. The AO in the remand report had mentioned that the assessee's registered office was located at Mathura Road, New Delhi on the date of affixture of notice. Subsequently, they shifted their registered office. Assessee had also stated that they had “misplaced” the intimation filed with the department on change of address. The CIT (A) had recorded a finding that assessee had wrongly claimed that they had informed the department about change of their registered office address, as not even a single intimation was presented before the AO or him.

On the other hand, the Revenue's counsel had contended that it was the obligation and responsibility of the assessee to intimate change of address to the AO as no return with the new address was furnished or even filed. Their conduct in not responding and appearing before AO was adversely commented upon by the CIT(A) and the said finding had not been disturbed by the tribunal. AO is both an investigator and an adjudicator. Normally a factual assertion made should be accepted by AO unless for justification and reasons the AO feels that he needs/requires a deeper and detailed verification of the facts alleged. The assessee in such circumstances should cooperate and furnish papers, details and particulars. This may entail issue of notices to third parties to furnish and supply information or confirm facts or even attend as witnesses. AO can also refer to incriminating material or evidence available with him and call upon the assessee to file their response. We cannot lay down or state a general or universal procedure or method which should be adopted by the AO when verification of facts was required. The manner and mode of conducting assessment proceedings had to be left to the discretion of the AO, and the same should be just, fair and should not cause any harassment to the assessee or third persons from whom confirmation or verification was required. The verification and investigation should be done with the least amount of intrusion, inconvenience or harassment especially to third parties, who may have entered into transactions with the assessee. Certain facts or aspects may be neutral and should be noted. These should not be ignored but they cannot become the bedrock or substratum of the conclusion. The provisions of Evidence Act were not applicable, but the AO being a quasi judicial authority, must take care and caution to ensure that the decision was reasonable and satisfies the canons of equity, fairness and justice. The evidence should be impartially and objectively analyzed to ensure that the adverse findings against the assessee when recorded were adequately and duly supported by material and evidence and can withstand the challenge in appellate proceedings. Principle of preponderance of probabilities applies. The reasoning and the grounds given in any decision or pronouncement while dealing with the contentions and issues should reflect application of mind on the relevant aspects. Merely producing PAN number or assessment particulars did not establish the identity of the person. The actual and true identity of the person or a company was the business undertaken by them. This according to us is the correct and true legal position, as identity, creditworthiness and genuineness have to be established. PAN numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertaining active nature of business activity. PAN is a number which is allotted and helps the Revenue keep track of the transactions. PAN number is relevant but cannot be blindly and without considering surrounding circumstances treated as sufficient to discharge the onus, even when payment is through bank account. On the question of creditworthiness and genuineness, it was highlighted that the money no doubt was received through banking channels, but did not reflect actual genuine business activity. The share subscribers did not have their own profit making apparatus and were not involved in business activity. They merely rotated money, which was coming through the bank accounts, which means deposits by way of cash and issue of cheques. The bank accounts, therefore, did not reflect their creditworthiness or even genuineness of the transaction. The beneficiaries, including the respondent-assessee, did not give any share-dividend or interest to the said entry operators/subscribers. The profit motive normal in case of investment, was entirely absent. In the present case, no profit or dividend was declared on the shares. Any person, who would invest money or give loan would certainly seek return or income as consideration.

Held that,

++ the contention that the Revenue must have evidence to show circulation of money from the assessee to the third party is fallacious and has been repeatedly rejected, even when Section 68 was not in the statute. In A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807, SC observed that it was not the duty of the Revenue to adduce evidence to show from what source, income was derived and why it should be treated as concealed income. The assessee must prove satisfactorily the source and nature of cash received during the accounting year. Similarly observations were made in CIT vs. M. Ganapathi Mudaliar [1964] 53 ITR 623 (SC), inter alia holding that it was not necessary for the Revenue to locate the exact source. This principle was reiterated in CIT vs. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194 (SC), wherein the contention that the Assessing Officer should indicate the source of income before it was taxable, was described as an incorrect legal position. Thus when there is an unexplained cash credit, it is open to the Assessing Officer to hold that it was income of the assessee and no further burden lies on him to show the source;

++ we are conscious of the doctrine of 'source of source' or 'origin of origin' and also possible difficulty which an assessee may be faced with when asked to establish unimpeachable creditworthiness of the share subscribers. But this aspect has to be decided on factual matrix of each case and strict or stringent test may not be applied to arms length angel investors or normal public issues. Doctrine of 'source of source' or 'origin of origin' cannot be applied universally, without reference to the factual matrix and facts of each case. The said test in case of normal business transactions may be light and not vigorous. The said doctrine is applied when there is evidence to show that assessee may not be aware, could not have knowledge or was unconcerned as to the source of money paid or belonging to the third party. This may be due to the nature and character of the commercial/business transaction relationship between the parties, statutory postulates etc. However, when there is surrounding evidence and material manifesting and revealing involvement of the assessee in the “transaction” and that it was not entirely an arm's length transaction, resort or reliance to the said doctrine may be counter-productive and contrary to equity and justice. The doctrine is not an eldritch or a camouflage to circulate ill gotten and unrecorded money. Without being oblivious to the constraints of the assessee, an objective and fair approach/determination is required. Thus, no assessee should be harassed and harried but any dishonest façade and smokescreens which masquerade as pretence should be exposed and not accepted;

++ in Lovely Exports, a Division Bench examined two earlier decisions of this court in CIT vs. Steller Investment Ltd. [1991] 192 ITR 287 (Delhi) and CIT vs. Sophia finance Ltd. (2003-TIOL-277-HC-DEL-IT). The decision in Steller Investment’s case was affirmed by the SC but, by observing that the conclusion was on the facts and no interference was called for. Lovely Exports was a case of public limited company where shares were subscribed by public and it was accordingly observed that the reasoning must apply a fortiori to large scale subscriptions to the shares of a public Company where the latter may have no material other than the application forms and bank transaction details to give some indication of the identity of these subscribers. It may not apply in circumstances where the shares are allotted directly by the Company/assessee or to creditors of the assessee. This is why this court has adopted a very strict approach to the burden being laid almost entirely on an assessee which receives a gift. Thereafter reference was made to Full Bench decision in the case of Sophia Finance Ltd.’s case wherein it has been observed that if the shareholders exists then, “possibly”, no further enquiry needs to be made and that the Full Bench had not reflected upon the question of whether the burden of proof rested entirely on the assessee and at which point this burden justifiably shifted to the assessing officer. The Full Bench has observed that they were not deciding as to on whom and to what extent was the onus to show that the amount credited in the books of accounts was share capital and when the onus was discharged, was not decided. The standard of proof might be rigorous and stringent and was dependent upon nature of the transaction and where there was evidence that the source of investment cannot be manipulated, it was material. Similarly, it was observed that assessee could scarcely be heard to say that he did not know the particulars of a donor in case of a gift. In Nova Promoters & Finlease, it was 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 provider, bank account statements etc. was not sufficient to discharge the onus;

++ in CIT v. Nipun Builders and Developers (2013-TIOL-32-HC-DEL-IT), this principle has been reiterated holding that the assessee and the Assessing Officer have to adopt a reasonable approach and when the initial onus on the assessee would stand discharged depends upon facts and circumstances of each case. In case of private limited companies, generally persons known to directors or shareholders, directly or indirectly, buy or subscribe to shares. Upon receipt of money, the share subscribers do not lose touch and become incommunicado. Call monies, dividends, warrants etc. have to be sent and the relationship is/was a continuing one. In such cases, therefore, the assessee cannot simply furnish details and remain quiet even when summons issued to shareholders under Section 131 return unserved and uncomplied. This approach would be unreasonable as a general proposition as the assessee cannot plead that they had received money, but could do nothing more and it was for the assessing officer to enforce share holders attendance. Some cases might require or justify visit by the Inspector to ascertain whether the shareholders/subscribers were functioning or available at the addresses, but it would be incorrect to state that the assessing officer should get the addresses from Registrar of Companies' website or search for the addresses of shareholders and communicate with them. Similarly, creditworthiness was not proved by mere issue of a cheque or by furnishing a copy of statement of bank account. Circumstances might require that there should be some evidence of positive nature to show that the said subscribers had made a genuine investment, acted as angel investors, after due diligence or for personal reasons. Thus, finding or a conclusion must be practicable, pragmatic and might in a given case take into account that the assessee might find it difficult to unimpeachably establish creditworthiness of the shareholder;

++ what we perceive and regard as correct position of law is that the court or tribunal should be convinced about the identity, creditworthiness and genuineness of the transaction. The onus to prove the three factum is on the assessee as the facts are within the assessee's knowledge. Mere production of incorporation details, PAN Nos. or the fact that third persons or company had filed income tax details in case of a private limited company may not be sufficient when surrounding and attending facts predicate a cover up. These facts indicate and reflect proper paper work or documentation but genuineness, creditworthiness, identity are deeper and obtrusive. Companies no doubt are artificial or juristic persons but they are soulless and are dependent upon the individuals behind them who run and manage the said companies. It is the persons behind the company who take the decisions, controls and manage them. The respondent herein is a Private Limited Company. It is not the case of the respondent that the Directors or persons behind the companies making the investment in their shares were related or known to them. It is highly implausible that an unknown person had made substantial investment in a private limited company to the tune of Rs.63,80,100/- and Rs.75,60,200/- in two consecutive assessment years 2002-03 and 2003-04 respectively without adequately protecting the investment and ensuring appropriate returns. Other than the share application forms, no other agreement between the respondent and third companies had been placed on record. The persons behind these companies were not produced by the respondent. On the other hand respondent adopted prevaricate and non- cooperation attitude before AO once they came to know about the directed enquiry and the investigation being made. Evasive and transient approach before AO is limpid and perspicuous. Identity, creditworthiness or genuineness of the transaction is not established by merely showing that the transaction was through banking channels or by account payee instrument. It may, as in the present case required entail a deeper scrutiny. It would be incorrect to state that the onus to prove the genuineness of the transaction and creditworthiness of the creditor stands discharged in all cases if payment is made through banking channels. Whether or not onus is discharged depends upon facts of each case. It depends on whether the two parties are related or known to each; the manner or mode by which the parties approached each other, whether the transaction was entered into through written documentation to protect the investment, whether the investor professes and was an angel investor, the quantum of money, creditworthiness of the recipient, the object and purpose for which payment/investment was made etc. These facts are basically and primarily in knowledge of the assessee and it is difficult for revenue to prove and establish the negative. Certificate of incorporation of company, payment by banking channel, etc. cannot in all cases tantamount to satisfactory discharge of onus. The facts of the present case noticed above speak and are obvious. What is unmistakably visible and apparent, cannot be spurred by formal but unreliable pale evidence ignoring the patent and what is plain and writ large. In view of the aforesaid discussion the substantial question of law framed in the two appeals is answered in favour of Revenue and against the assessee. The appeal is accordingly allowed to the extent indicated above. The Appellant is also entitled to costs which is assessed at Rs.20,000/.