Ajat Wadhwa, FCA 1 SHARE CAPITAL & UNSECURED LOANS

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<ul><li>Slide 1</li></ul><p>Ajat Wadhwa, FCA 1 SHARE CAPITAL &amp; UNSECURED LOANS Slide 2 Ajat Wadhwa, FCA 2 THE RELEVANT PROVISION SECTION 68 OF THE ACT SECTION 68 OF THE ACT Deeming provision-substantive creates a liability/charge Deeming provision-substantive creates a liability/charge Applicability when Applicability when Credit of amount in books maintained by A Credit of amount in books maintained by A Sum to be credited in previous year Sum to be credited in previous year A offers no explanation about nature and source thereof A offers no explanation about nature and source thereof A offers explanation not satisfactory in opinion of AO. A offers explanation not satisfactory in opinion of AO. The sum so credited may be charged The sum so credited may be charged Slide 3 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 Slide 4 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 &amp; Tyagi (P) Ltd 136 Taxman 641(Del) &amp; 267 ITR 433, Avtantika Investment 262 ITR 493(Del), Achal Investment 268 ITR 335(Del), - Makhni &amp; Tyagi (P) Ltd 136 Taxman 641(Del) &amp; 267 ITR 433, Avtantika Investment 262 ITR 493(Del), Achal Investment 268 ITR 335(Del), Slide 5 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 &amp; 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. 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. Slide 6 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 Honble 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 Honble Supreme Court in the case of lovely exports, the appeal of the department was dismissed. Slide 7 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&amp;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 Slide 8 Ajat Wadhwa, FCA 8 No need for fresh opportunity. No need for fresh opportunity. CIT v. Indocon Finance &amp; Investment Ltd,1 DTR 25 (Del) CIT v. Indocon Finance &amp; 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 Honble Chandigarh Tribunal in the case of Neena Syal 70 ITD 62. Slide 9 Ajat Wadhwa, FCA 9 ALLEGATIONS OF BOGUS MONEY- REOPENING OF ASSESSMENT Nova Promoters Finlease Nova 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 140 Del No material on record to doubt affidavit and no cross examination taken- affidavt to be true. 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. Retraction after 3 years. Modus operandi graphic and names A. 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. 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. 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. Slide 10 Ajat Wadhwa, FCA 10 Proviso to Sec 68 w.e.f. 1-4-13 Applicable to companies in which public not interested. 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. 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: 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. Slide 11 Ajat Wadhwa, FCA 11 Unsecured loans Judge made law Assessee to establish identity of giver, genuineness of transaction and creditworthiness of giver. Judge made law Assessee to establish identity of giver, genuineness of transaction and creditworthiness of giver. Identity-PAN, ROI, Passport etc Identity-PAN, ROI, Passport etc Genuineness-bank statement, confirmation, relationship etc. Genuineness-bank statement, confirmation, relationship etc. Creditworthiness- assets list, robust return of income, large credits in the bank. 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. 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. 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. Gift: Most strict-relationship, rigorous test of creditworthiness. Mohan akala 291 ITR 278 SC. Slide 12 Ajat Wadhwa, FCA 12 1.Assessee offers no explanation means no proper, reasonable and acceptable explanation 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. 2.Sumiti Dayal 214 ITR 801 (SC) Receipt of money is prima facie evidence against A. 3. Daulat Ram Rawatmull 87 ITR 349 SC 3. Daulat Ram Rawatmull 87 ITR 349 SC OD taken by assessee firm-security FD of partners son- deposits adjusted OD. 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. 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 doesnt mean it belonged to assessee. Extraneous and irrelevant consideration-same bank-no consideration-owner not properly explained source of deposit doesnt mean it belonged to assessee. Slide 13 Ajat Wadhwa, FCA 13 Orissa Corporation 159 ITR 78 SC. 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. 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- 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. Rohini Builders 76 TTJ 521 Ahd-TDS on interest paid-PAN given-merely because summons returned-no addition can be made. Slide 14 Ajat Wadhwa, FCA 14 EXAMINATION OF THE SOURCE OF 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 cant 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. if third party confirms her deposit then A cant 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. 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. 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 ARAVALI TRADING 220 CTR 622 RAJ- Two out of four creditors appeared but all confirmed having given loans-also filed evidence of appeared but all confirmed having given loans-also filed evidence of source- source of creditors found weak and unacceptable-held no source- source of creditors found weak and unacceptable-held no nexus between money given by creditors and assessee found-addn if nexus between money given by creditors and assessee found-addn if any to be in hands of creditors. any to be in hands of creditors. Slide 15 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 didnt 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 wont lead to addition. Sarogi Credit Corporation 103 ITR 344 Pat- Once identity establi...</p>