APPELLATE PROCESS UNDER THE INCOME-TAX ACT
3.1 Introduction 16
3.2 Overview of statutory provisions of the Act relating to Joint Commissioner/Commissioner (Appeals) 17
3.3 Appeal v. Revision 18
3.4 Judicial view differentiating revisionary and appellate powers 18
3.5 Alternate dispute resolution mechanisms 19 4
INSTITUTION OF COMMISSIONER (APPEALS)
4.1 Statutory framework 20
4.2 Judicial view on the role of Commissioner (Appeals) 21
4.3 Summary of legal provisions relating to Commissioner (Appeals) 22
5
INSTITUTION OF JOINT COMMISSIONER (APPEALS)
5.1 Statutory framework [Section 246] 24
5.2 Appealable orders for appeal before Joint Commissioner (Appeals) [Section 246(1)] 25
5.3 Appeal against assessment orders 25
5.4 Appeal against orders relating to TDS/TCS matters 27
5.5 Relating to penalty orders 28
5.6 Relating to rectification orders 28
5.7 Orders against which appeal cannot be filed before Joint Commissioner (Appeals) [Proviso to section 246(1)] 28
5.8 Transfer of pending appeal from Commissioner (Appeals) to Joint Commissioner (Appeals) [Section 246(2)] 29
5.9 Meaning of appeal ‘pending’ before Commissioner (Appeals) 29
5.10 Relevance of expression “any matter arising out of or connected with such appeal and which is so pending” 31
5.11 Transfer of pending appeal from Joint Commissioner (Appeals) to Commissioner (Appeals) [Section 246(3)] 33
5.12 Disposal of appeals in a faceless manner [Section 246(5)] 34
5.13 Form of appeal and limitation [Section 249] 34
5.14 Procedure of appeal [Section 250] 34
5.15 Limitation period to dispose of the appeal by Joint Commissioner (Appeals) [Section 250(6A)] 35
5.16 Powers of the Joint Commissioner (Appeals) [Section 251] 35
5.17 Powers of the Joint Commissioner (Appeals) to levy penalty 35
5.18 Consequential amendments due to the introduction of the Joint Commissioner (Appeals) 36
5.19 Amendment in other provisions of the Act 36 6
RIGHT TO APPEAL
6.1 Introduction
6.2
6.3
6.5
6.6
6.18
6.19 Association of persons, body of individuals (whether incorporated or not), local authority, and every artificial juridical person 48
6.20 Judicial view 48
APPEALABLE ORDERS BEFORE THE COMMISSIONER (APPEALS)
7.1 Introduction 49
7.2 Appealable orders before Joint Commissioner (Appeals) 49
7.3 Appealable orders before Commissioner (Appeals) 50
7.4 Judicial view 53
7.5 Order by a Joint Commissioner under section 115VP(3)(ii) rejecting an application under Tonnage Tax Scheme 53
7.6 Order holding a person liable to be assessed under the Act 54
7.7 Judicial view 54
7.8 Appeal against an intimation under section 143(1) or section 143(1B) 56
7.9 Judicial view 57
7.10 Appeal against intimation under section 200A(1) or section 206CB(1) where the deductor or collector objects to be making of adjustments in the statement of TDS or TCS filed (as amended by the Finance Act, 2015 w.e.f. 1-6-2015) 58
7.11 Judicial view 59
7.12 Appeal against assessment under section 143(3) or 144 60
7.13 Judicial view 62
7.14 Appeal against (re)assessment under section 147 with respect to income escaping assessment 64
7.15 Judicial view 65
7.16 Appeal against an order of assessment under section 153A in case of search or requisition 66
7.17 Appeal against an order passed by an Assessing Officer pursuant to an Advanced Pricing Agreement (APA) 66
7.18 Appeal against an order of rectification of mistake 67
7.19 Judicial view 67
7.20 Appeal against order under section 163 treating assessee as agent of non-resident 69
7.21 Judicial view 69
7.22 Appeal against an order under section 170 treating a person as a successor 69
7.23 Appeal against order under section 171 as regards partition of a Hindu Undivided Family 70
7.24 Judicial view 70
7.25 Appeal by person charged as assessee in default under section 201 or 206C for not deducting or collecting tax at source 70
7.26 Judicial view 71
7.27 Appeal against an order under section 237 refusing refund 71
7.28 Judicial view
7.29 Appeal against an order under section 239A relating to refund of tax paid under an agreement or arrangement in writing 72
7.30
8.1
8.2
8.3
8.4
8.5
APPEAL BY PERSON DENYING LIABILITY TO DEDUCT TAX (SECTION 248 AS APPLICABLE W.E.F. 1.6.2007)
PROCEDURE FOR FILING OF APPEAL [SECTION 249(1) AND RULES 45 & 46] 9.1
9.5 Manner of furnishing accompanying documents 87
9.6 Procedure for e-filing of appeal to Commissioner (Appeals) 87
9.7 Administrative procedure for e-filing of appeals 90
9.8 Filing appeal electronically using digital signatures 90
9.9 “Electronic Verification Code” (EVC) - Meaning and procedure 91
9.10 Verification of appeal
9.11
10.1
STATEMENT OF FACTS (SoF) AND GROUNDS OF APPEAL (GoA)
(SoF)
11
FEES FOR FILING OF APPEAL BEFORE COMMISSIONER (APPEALS) [SECTION 249(1)]
LIMITATION PERIOD FOR FILING APPEAL [SECTION 249(2) AND SECTION 249(3)]
12.1 Period of limitation
12.2 Manner of determining date of service - Statutory provisions
12.3 Service of communication by other than electronic mode
12.4 Service of communication electronically
12.5 Conclusion
12.6 Exclusion of time for calculating limitation for filing appeal [Section 268]
12.7 Situation where due date is a holiday
12.8 Judicial view on date of service
12.9 Condonation of delay [Section 249(2) and 249(3)] 121
12.10 Judicial view on sufficient cause in the context of the Income-tax Act 123
12.11 Manner of filing an affidavit in support of reasons for delay 127
12.12 Judicial view on filing of affidavit in support of reasons of delay 128
12.13 Judicial view on procedure to be followed for condonation of delay 128
12.14 Judicial view on circumstances exhibiting existence of “sufficient cause” 129
12.15 Judicial view on circumstances not exhibiting existence of “sufficient cause” 137
13
PAYMENT OF ADMITTED TAX BEFORE FILING OF APPEAL [SECTION 249(4)]
13.1
13.2
13.3 Exemption from payment of advance tax payable when no return of income has been filed [Proviso to section 249(4)]
14
PROCEDURE IN APPEAL BEFORE COMMISSIONER (APPEALS) [SECTION 250 SUB-SECTIONS (1), (2) AND (3)]
14.5 Filing of response or submission of report in response to
14.6
14.7
14.8
14.9
14.13 Power/right to grant/seek adjournment 163
14.14 Judicial view 164
14.15 Judicial view on adjournments sought by/failure of counsel (authorized representative) to appear before appellate authority 164
14.16 Rectification proceedings (clause 7 of the Faceless Appeal Scheme, 2021) 165
15
POWER OF COMMISSIONER (APPEALS) TO MAKE FURTHER ENQUIRIES [SUB-SECTION (4) OF SECTION 250]
15.1 Introduction 168
15.2 Calling of information and conducting further enquiry by the Commissioner (Appeals) [Section 250(4)] 170
15.3 Calling of information etc. at the instance of Assessing Officer 170
15.4 Exercise of power to make enquiries at the instance of an assessee 170
15.5 Judicial view 171
15.6 Enquiry by Commissioner (Appeals) through the Assessing Officer/power of remand 174
15.7 Judicial view 174
15.8 Procedure for making further enquiries either suo motu or at the instance of the Assessing Officer in faceless appellate proceeding 176
16
ADDITIONAL GROUND/FRESH CLAIM BEFORE COMMISSIONER (APPEALS) [SECTION 250(5)]
16.1 Introduction 177
16.2 Supreme court’s view on the right to raise additional ground 178
16.3 Judicial view on the right to agitate additional ground 180
16.4 Finding to be recorded for exercise of power under section 250(5) 182
16.5 Judicial view 182
16.6 Judicial view on law of limitation for additional ground 184
16.7 Fresh claim 185
16.8 Judicial view 185
16.9 Filing of additional ground in faceless appeal proceedings 189 17
ADMISSION OF ADDITIONAL EVIDENCE (RULE 46A OF THE INCOME-TAX RULES, 1962)
17.1 Introduction 191
17.2 Powers to make rules regulating admission of additional evidence 192
17.3 Circumstances in which additional evidence may be produced [Rule 46A(1)] 193
17.4 Commissioner (Appeals) to record reason for admission of additional evidence [Rule 46A(2)] 193
17.5 Reasonable opportunity to be provided to Assessing Officer [Rule 46A(3)] 194
17.6 Additional evidence can be obtained by first appellate authority on its own motion [Rule 46A(4)] 194
17.7 Judicial view on vires of rule 46A 194
17.8 Summary of provisions relating to production and admission of additional evidence 194
17.9 Judicial view on filing of additional evidence and power of Commissioner (Appeals) 196
17.10 Judicial view on failure to provide opportunity to Assessing Officer being fatal to admission of additional evidence 203
17.11 Judicial view on the necessity of Commissioner (Appeals) to give a categorical finding in terms of rule 46A for admission of additional evidence in case Assessing Officer objects to the admission thereof 208
17.12 Judicial view on sending documents submitted by appellant to the Assessing Officer for remand report 210
17.13 Comparison of rule 46A(4) of the rules and section 250(4) of the Act - Complementary not conflicting 211
17.14 Judicial view 212
17.15 Procedure for admission of additional evidence (clause 5(1)(vii) and (viii) of the Faceless Appeal Scheme, 2021) 214
18
MODALITY OF PASSING ORDERS BY THE COMMISSIONER (APPEALS) AND COMMUNICATION OF THE ORDERS PASSED [SECTION 250(6) AND (7) RESPECTIVELY]
18.1 Introduction 217
18.2 Judicial view on reasoned and speaking order 219
18.3 Judicial view on consolidated order for more than one appeal 223
18.4 Passing of final appeal order under faceless appeal proceedings 224
19
ADVISORY LIMITATION FOR DISPOSAL OF APPEALS [SECTION 250(6A)]
19.1 Introduction 225
19.2 Departmental circular on advisory time-limit for disposal of appeals by the Commissioner (Appeals) 225
19.3 Departmental instructions on time-limit for passing of orders by the Commissioner (Appeals) 226
19.4 Judicial view 227
20
FACELESS APPEALS [SUB-SECTIONS (6B), (6C) AND (6D) INSERTED BY THE FINANCE ACT, 2020 W.E.F. 1-4-2020]
20.1 Introduction and scope 228
20.2 Faceless appeal centres (Paragraph 4 of the Scheme) 231
20.3 Assignment of appeal 232
20.4 Procedure after assignment of appeal (Paragraph 5(ii) of the Scheme) 232
20.5 Procedure for submitting condonation of delay in filing appeal to Commissioner (Appeals) 232
20.6 Exercise of power u/s 250(4) (Para 5(1)(ii) and (iii) of the Scheme) and further procedure in faceless appellate proceedings 235
20.7 Filing additional ground(s) (Para 5(1)(v) and (vi) of the Scheme) 235
20.8 Filing additional evidence (Para 5(1)(viii)(a) to (g) of the Scheme) 236
20.9 Procedure for submitting additional evidence to Commissioner (Appeals) 237
20.10 Requisition by the NaFAC or Assessing Officer for the production of documents or evidence or examination of witness relevant for appellate proceedings (Para 5(1)(viii) (h) to (l) of the Scheme) 240
20.11 Enhancement of assessment/penalty or reduction of the amount of refund (Para 5(1)(ix) of the Scheme) 241
20.12 Passing of final appeal order (Para 5(1)(x) of the Scheme) 241
20.13 Transfer of case to another Commissioner (Appeals) (Para 5(2) of the Scheme) 242
20.14 Penalty proceedings (Para 6 of the Scheme) 242
20.15 Rectification proceedings (Para 7 of the Scheme) 243
20.16 Personal appearance during faceless proceedings (Para 12 of the Scheme) 244
20.17 Delivery of electronic record (Para 11 of the Scheme) 245
20.18 Exchange of communication exclusively by electronic mode (Para 9 of the Scheme) 247
20.19 Authentication of electronic record (Para 10 of the Scheme) 247
20.20 Specifying format, mode, procedure and processes by the NFAC (Para 13 of the Scheme) 247
20.21 Appeal against order passed by NFAC (Para 8(1) of the Scheme) 248
20.22 Proceedings in remand cases (Para 8(2) of the Scheme) 248
20.23 Definitions and concepts used in the Faceless Appeal Scheme 248
20.24 Benefits envisaged from the faceless appeals process 250
20.25 Potential pitfalls/areas of concern
20.26 Judicial view
POWERS OF THE COMMISSIONER (APPEALS) [SECTION 251]
21.1 Introduction
21.2 Confirmation of assessment/tax liability
21.3 Judicial view
21.4 Reduction of assessment/tax liability
21.5 Enhance the assessment/tax liability
21.6 Judicial view
21.7 Exercise of power of enhancement at the instance of Assessing Officer
21.8 Reasonable opportunity of showing cause
21.9 Judicial view
21.10 Power to annul an order/assessment
21.11 Judicial view on the powers of “annulment”
21.12 Appeals against the levy of penalty
21.13 Judicial view
21.14 Powers of Commissioner (Appeals) wide ranging and coterminous with the Assessing Officer
21.15 Judicial view - Powers of Commissioner (Appeals) vis-a-vis court of appeal under code of civil procedure
21.16 Judicial decisions - Scope of powers of Commissioner (Appeals) co-terminous with Assessing Officer
21.17 Judicial view on the power of Commissioner (Appeals) to levy penalty 277
21.18 Judicial view on power of Commissioner (Appeals) to reject books of account 277
21.19 Judicial view on non-exercise of power/errors made by the Assessing Officer can be corrected by the first appellate authority 277
21.20 Judicial view on limitations on the power of Commissioner (Appeals) 278
LEGAL PRINCIPLES RELEVANT IN APPELLATE PROCEEDINGS
22.1 Doctrine of merger - Introduction
22.2 Principle of consistency - Introduction
22.3 Binding force of judicial precedents - Introduction
22.4 “Obiter dicta” and “ratio decidendi”
APPEALS AGAINST AGREED ADDITIONS
23.1 Introduction 305
23.2 Procedure to be followed in appeal against agreed additions 306
23.3 Judicial view in favour of the assessee (holding that the appellate proceedings can be pursued in case of agreed additions) 306
23.4 Judicial view favouring revenue (that appeal does not lie against agreed additions) 307
24
APPELLATE PROVISIONS - POWER TO WITHDRAW
24.1 Introduction
25
STAY OF DISPUTED DEMAND
25.1 Power of appellate authority to stay disputed demand [Section 220(6)] 312
25.2 Judicial view upholding the right of Commissioner (Appeals) to grant stay 313
25.3 Judicial view denying the Commissioner (Appeals) power to grant stay 315
25.4 Judicial view on grant of stay miscellaneous issues 315
SPECIAL PROVISIONS
FOR AVOIDING REPETITIVE APPEALS (CHAPTER - XIV-A)
26.1 Introduction
26.2 Procedure
26.3 Declaration by assessee
26.4 Report from Assessing Officer
26.5 Order of the Assessing Officer or the Appellate Authority
26.6 Admission of claim
26.7 Application of decision
26.8 Order to be final
26.9 Judicial view
DISPUTE RESOLUTION COMMITTEE - AN ALTERNATIVE TO THE APPELLATE PROCESS (CHAPTER XIX-AA)
27.1 Introduction 321
APPENDICES
APPENDIX 1: Faceless Appeal Scheme, 2021 329
APPENDIX 2: Specimen of challan for payment of appeal fees 343
APPENDIX 3(A): Specimen of notice of hearing issued by the national faceless appeals centre 344
APPENDIX 3(B): Specimen of notice of hearing issued for personal hearing before Commissioner (Appeals) 346
APPENDIX 4: Specimen application under section 46A seeking admission of additional evidence 348
APPENDIX 5: Specimen of application to seeking permission to agitate additional ground/make fresh claim before Commissioner (Appeals) 351
APPENDIX 6(A) : Initiation of reassessment proceedings u/s 148 of the Income-tax Act 353
APPENDIX 6(B) : Addition u/s 68 of the Act 372
APPENDIX 6(C) : Addition of Rs. Xxxxxxx being the alleged difference in receipts reported in Form 26AS and actual receipts from M/s xxxxxx 396
APPENDIX 6(D): Addition of Rs. Xxxxxx reduced by the appellant company from its profit as an adjustment pursuant to ICDS VII- “Government Grants” 404
APPENDIX 6(E): Addition on account of purchases made from various parties by treating them as bogus by resorting section 37 of the Act 412
APPENDIX 6(F): Addition u/s 56(2)(viib) on account of alleged excess share premium received 419
APPENDIX 6(G): Assessment framed not in accordance with departmental procedures and consequently void ab initio and non est 433
APPENDIX 6(H): Addition on account of deemed dividend under section 2(22)(e) 438
APPENDIX 6(I): Denial of exemption u/s 10(38) on long term capital gains 445
APPENDIX 6(J): Treating interest received during construction period as a revenue receipt 467
APPENDIX 6(K): Addition on account of alleged misutilization of facility of client code modification 475
APPENDIX 6(L): Addition on account of foreign exchange fluctuation loss 482
APPENDIX 6(M): Addition by rejecting books of account and adopting an arbitrary 489
APPENDIX 6(N): Challenge of assumption of jurisdiction u/s 153A 495
APPENDIX 6(O): Denial of exemption under section 54F for capital gains invested in the purchase of a residential property 500
APPENDIX 6(P): Addition u/s 14A r.w. rule 8D on account of expenses incurred to earn exempt income and on account of mismatch in receipts disclosed in the profit and loss account and those appearing in Form 26AS 511
APPENDIX 6(Q): Addition on account of imputing notional interest income on interest free advances 519
APPENDIX 6(R): Disallowance under sec. 14A r.w.r. 8D on account of expenses incurred to earn exempt income, exceeding exempt income or where there is no exempt income 525
APPENDIX 6(S): Penalty under section 271(1)(b) for alleged failure to comply with a notice u/s 142(1) or 143(2) 529
APPENDIX 6(T): Levy of penalty under section 271(1)( c ) for alleged co ncealment/furnishing inaccurate particulars of income 531
APPENDIX 6(U): Additions on account of ad hoc disallowances out of expenses 546
APPENDIX 6(V): Disallowance of share based compensation (“ESOP”) expenses 550
A. SUMMARY
APPENDIX 6(B)
ADDITION U/S 68 OF THE ACT
Name of the Assessee M/s xxxxxxxxxxxxx
Source of Income/ Nature of Business xxxxx
Assessment Year xxxxxx
Returned Income
Rs. xxxx/Addition made Nature Quantum (Rs.)
Addition of Rs. xxxxxxx received by the Appellant Company from the various companies, by resorting to the provisions of Section 68 of the Act, on the ground that the genuineness and creditworthiness of the said receipts had allegedly not been proved.
Assessed
B. STATEMENT OF FACTS
(1)(a) The Appellant Company had filed its return of income on xxxxxx declaring therein an income of Rs. xxxxxxxx. The case was case was selected for scrutiny and notice u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) was issued to the Appellant Company on XXXXX.
(2) Subsequently, notices u/s 143(2)/142(1) of the Act along with questionnaires were issued from time to time. In response thereto, the (re) assessment proceedings were attended from time to time, replies furnished and the relevant details as asked for filed. In particular detailed replies were filed.
(3)(a) During the year under appeal, the Appellant Company had received share application money of Rs. XXXX from the following parties:—
Sl. No.
1.
2.
Name of the Company Share Premium Closing balance as on XXXX
(b) In the course of the assessment proceedings various documents including confirmation, bank statement, Income Tax Return and audited accounts of investee companies were duly filed before the Ld. Assessing Officer.
(4) However, the Ld. Assessing Officer while framing the assessment has proceeded to, arbitrarily and unjustifiably, add back a sum of Rs. xxxxxx received by the Appellant Company from the from the various companies on the ground that the genuineness and creditworthiness of the said receipts had allegedly not been proved by resorting to the provisions of Section 68 of the Act.
(5) The said addition is unjustified, arbitrary and not sustainable either on facts or on law and is being challenged by virtue of this appeal.
(6) In addition, the assessment framed is bad in law in as much as the requisite conditions for resort to the reassessment provisions were not fulfilled and satisfied in the instant case, hence this appeal.
C. GROUNDS OF APPEAL
(1) That the assessment order dated XXXXX passed u/s 143(3) of the Incometax Act, 1961 by the Ld. Income Tax Officer, xxxxxx is against the law and facts on the file in as much as he has gravely erred in computing total income at Rs. xxxxxxx as against returned income of Rs. Nil.
(2) That the assessment order dated xxxxxxxx passed u/s 143(3) of the Incometax Act, 1961 by the Ld. Income Tax Officer, xxxxxx is against the law and facts on the file in as much as he was not justified to add back a sum of Rs. xxxxxxx received by the Appellant Company from the various companies, by resorting to the provisions of Section 68 of the Act, on the ground that the genuineness and creditworthiness of the said receipts had allegedly not been proved.
D. DRAFT WRITTEN SUBMISSION
The above grounds challenge the action of the Ld Assessing Officer in making additions of Rs. xxxxxxx on account of share application money/premium received from M/s xxxxxxx M/s xxxxxxxxx, M/s xxxxxxxxx by recourse to the provisions of Section 68 of the Income-tax Act, 1961.
In this connection, the following submissions are being made for and on behalf of the Appellant Company:
(1) During the year under appeal, the Appellant Company had received share application money of Rs. xxxxxxxxx from the following parties:-
(2) The Ld Assessing Officer in the course of assessment proceedings had asked the Appellant Company to prove the identity, genuineness and creditworthiness of the subscribers from whom the share application money including premium had been received and had also asked it to show cause as to why the said Rs xxxxxx should not be treated as alleged sham transactions aimed only to bring unaccounted money in the guise of accommodation entry as per provision of Section 68 of the Income-tax Act, 1961.
(3) In response, the Appellant Company duly filed requisite details with the Ld. Assessing Officer including confirmations, copies of ITR, Bank statements and Annual Account of said parties. The subsequent queries raised were replied and details asked for were filed from time to time.
(4) The entire amount had been received by the Appellant Company through normal banking channels by account payee cheques/demand drafts. Furthermore, the confirmations filed clearly reveal the source of funds, particulars of the bank account through which payments had been received and the Income-tax particulars whereby the identity and creditworthiness of the Investors is established authoritatively and conclusively. Furthermore, the confirmations filed by all the parties also clearly reveal the source of funds, particulars of the bank account through which payment has been received/paid and their Income-tax particulars which go on to establish the identity and creditworthiness of the respective share applicants authoritatively and conclusively.
(5) However, the replies filed both by the Appellant Company and the investors and the explanations furnished did not find favour with the Ld. Assessing Officer who has proceeded to make the impugned addition on the basis of arguments and various case laws as discussed in the body of the assessment order.
(6) It is the Appellant Company’s, prima facie, humble submission that as result of the various documents filed before the Ld. Assessing Officer in respect of the said parties no cause exists for a recourse to the provisions of section 68 of the Act in as much as the onus cast on the Appellant Company as mandated by the said section had been effectively and comprehensively discharged and that the said addition is neither warranted nor justified on the facts of the case nor sustainable in law. The action of the Ld. Assessing Officer mitigates not only against the spirit but also letter of the applicable provisions of the Act.
(7) In this connection before proceeding further it would be worthwhile to reproduce the provisions of S.68 of the Act which read as follows: —
Section 68. Where any sum is found credited in the books of an Appellant maintained for any previous year, and the Appellant offers no explanation about the nature and source thereof or the
explanation offered by him is not, in the opinion of the officer, satisfactory, the sum so credited may be charged to income-tax as the income of the Appellant of that previous year.
(8) Section 68 of the Act is an anti-tax evasion provision and was incorporated into the Act to obviate the possibility of introduction of unaccounted/ undisclosed money in the books of account in the names of relations or third parties. The object behind the insertion of Section 68 in the Act is to assess such income when it surfaces and assess it in the hands of the person in whose books it surfaces. The above Section as applicable for the year under appeal casts an onus upon an Assessee, the duty to adequately, satisfactorily and substantively explain the source of any cash credit in his books of account and no further.
(9) As laid down by various Courts the three important ingredients of section 68 of the Act are proof of identity and credit worthiness of the investor/ lender and genuineness of the transaction. The various ingredients of Section 68 of the Act and the manner in which they need to be satisfied, in the light of various judicial decisions are discussed below: -
A. IDENTITY
In order to prove the identity of the Investors an Assessee is required to prove, on the basis of concrete documentary evidence, that the Investors exists and is uniquely identifiable on the basis of certain characteristics/ distinct features. In common parlance, identity of a person/entity refers to a quality that makes someone or something what they are and how they are different/unique from other people/entities.
B. CREDITWORTHINESS
In common as well as financial parlance, credit worthiness of an Investor/ depositor refers to an assessment of his ability to lend money based on an analysis of his/their financial and other parameters. The said meaning when extrapolated in the context of the Act would refer to the ability of the Investor to invest money.
C. GENUINENESS OF THE TRANSACTION
The third limb of section 68 viz. onus to prove the genuineness of the transactions seeks “to ensure that the sub-stratum/pivot of the transaction stands on a firm edifice and is not a camouflage in any manner.” Moreover, the question of genuineness of a transaction recedes into relative oblivion when the identity and credit worthiness of the depositors are duly established.
(10) In the instant case there are no circumstances to even suggest, let alone prove conclusively that the transactions are not genuine and that the onus cast u/s 68 of the Act has not been discharged.
(11) While determining the applicability of Section 68 of the Act to any transaction, a set of mutually linked and related factors have to be considered
in totality by adopting a global view and not isolated. The manner in which the above ingredients have been met and satisfied in the instant case is being discussed as follows:
A. IDENTITY
(a) The party from whom share capital/premium/Unsecured Loans has been received during the year are “Limited companies incorporated under the provisions of the Companies Act, 1956” In this regard confirmation, bank statement, Income-tax Return and Balance Sheet were duly filed before the Ld. Assessing Officer and are again being enclosed herewith.
(b) The existence and identity of the said Companies stand corroborated by the certificate of incorporation granted by the jurisdictional Registrar of Companies, a statutory body entrusted with the tasks of over-seeing the implementation and compliance with the provisions of the Companies Act, 1956.
B. CREDITWORTHINESS
(a) The Ld. Assessing Officer has while determining the credit worthiness of the investors laid stress on the “source of the deposit” and the fact that, allegedly, a scrutiny of bank accounts reveals that there was a trend of large of large high value transfer credits followed by immediate transfers favouring various accounts on the same day. In this connection, it is respectfully submitted that the provisions of section 68 of the Act, as applicable to the year under appeal, did not put the onus on Appellant to prove the source of source in order to prove the credit worthiness of the investors. In other words, the provisions of section 68 of the Act, as in operation for the year under review, only mandate the source to be proved which onus had clearly been discharged by the Appellant Company. Moreover, no cash transactions had taken place in any of the bank accounts which would further prove the credit worthiness of the various amounts deposited.
(b) The question of the manner in which the onus u/s 68 has to be discharged is to be looked at with different perspectives and varying parameters in each different circumstance and no standards/ guidelines can be laid out in this regard. However, in a case where money has flown through normal banking channels, has been duly disclosed in the books of account and the transaction has been confirmed by the parties thereto and not been repudiated in any manner the question of credit worthiness itself gets answered in the affirmative.
(c) In the instant case there is no material on record to prove or even remotely suggest that the amounts received actually emanated from the Appellant Company. In fact it may be reiterated that the share application money was received from independent, legally
incorporated companies through normal and regular banking channels which fact stands duly corroborated and confirmed by the confirmations and Income-tax Returns of the parties duly placed on record. In fact, no evidence, direct or indirect or circumstantial or even peripheral exists to doubt in any manner the identity and credit worthiness of the parties and genuineness of the transactions entered into.
C. GENUINENESS OF THE TRANSACTION
In the instant case, in the face of the authoritative documentary evidence filed/available with the Ld. Assessing Officer and the arguments cited above, it is clear that there is no ground of any nature or dimension whatsoever to doubt the genuineness of the transactions especially considering the following facts: -
The share applicants/depositors are companies incorporated under the provisions of the Companies Act, 1956 whose identities have not been questioned in any manner;
The share applicants/depositors have duly confirmed the fact of their having deposited money in the Appellant Company and duly supplemented their confirmations with either/or Income Tax Returns, Annual Accounts, etc.
(12) Section 68 of the Act stipulates that the nature and the source of the transaction should be explained to the satisfaction of the Ld. Assessing Officer. In the instant case, the nature of the transaction is share capital/ application money received and the source of the transaction is the name of the party having an income-tax permanent account number and a legal entity having the status of an artificial legal person incorporated under a special enactment namely, the Companies Act,1956. Therefore, both the nature of the transaction has been established and the source of the transaction been proved and accordingly no cause exists for resort to the provisions of Section 68 of the Act.
(13) In particular, the specific arguments just forward by the Ld. Assessing Officer while making the impugned addition can be countered as follows:-
(a) With regard to the factum of the notice under section 133(6) of the Act having not been served, the perceived inability of the Appellant Company to produce the Directors of the Investing companies, it should be noted that all the companies are independent incorporated bodies with not only a separate legal entity but an entirely independent operating structure/edifice and the Appellant Company does not have any real or even notional control over their general working let alone day-to-day operations. As such the action or the failure to act by any independent and unrelated third party cannot be used against the Appellant Company so long as it itself has discharged its onus by furnishing not only the basic but also the substantive requisite information/documentation/ evidence in
(
this regard i.e. the Confirmations, Bank Statements and Income-tax Returns of the relevant parties.
b) It would be pertinent to mention here that replying to an income-tax notice, responding to notice or even the manner and time in which the office is kept open/closed by a third party are issues over which the Appellant Company does not have and cannot be expected to have any degree or nature of control whatsoever. Accordingly, these factors recede not only into relative insignificance but ignominy while determining the extent to which the onus cast u/s 68 of the Act has been discharged by the Appellant Company. The said issue comes into sharper and distinct focus when the fact that all the Investors are in the nature of passive/long term Investors who hope to benefit from the long term appreciation in the underlying investment and not from short-term returns by way of dividends etc. and as such are not in regular contact with the Appellant Company and over which the Appellant Company does not have any kind of control whereby it was also not in a position to enforce the personal attendance of their Directors.
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c) While arriving at the adverse conclusion, the Ld. Assessing Officer has unjustifiably concluded that the Investors are dummy/fake/paper companies providing and facilitating accommodation entries. The Ld. Assessing Officer has also used certain indicators such as the Investor Companies not having fixed assets, reporting meagre income and carrying out huge amount of banking transactions with many concerns which are dubious in nature without any economic rationale and that all the companies are not actually working have no profit generating apparatus, have no business prudence, without any sound business model and no genuine profits at all.
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d) It is not clear as to how, a cursory glance at the bank statement and that too only superficial could lead to a conclusion of such astronomical proportions. In fact, the movement of funds, even on the same day, is indicative of fast paced decision making and prudent business practices wherein money is not kept idle but is deployed at earliest for further business needs and reflect the business activities being carried out by it.
(e) The said arguments garnered by the Ld Assessing Officer seek to question the economic rationale, logic and business prudence behind the decision of the Investors to invest in the Appellant Company. The said arguments/assertions of the Ld Assessing Officer seek to read the mind of an assessee with a view to judge the decision made by him on the canons of rationality, prudence, logic and economic sustainability. Moreover, he also seeks to derive for reaching conclusions in respect of a transaction/decision merely on the basis of what “appears” and not what “actually is”.
(f) It may be vehemently submitted that except when specifically permitted and that also within defined parameters, it is neither within the realm of any tax-authority to judge a transaction in such a manner, except when there is concrete, defining, unflinching and conclusive evidence to the contrary nor within their power to judge a transaction by applying the subjective yardsticks of rationality, prudence and the like. In addition, the benefit of hindsight wherein circumstances and surroundings may undergo a vast and unrecognizable transformation cannot be used to judge a historical transaction carried out bona fide and in accordance with the relevant applicable procedure.
(g) While the conclusion arrived at by Ld. Assessing Officer is derived from mere indications and is bereft of any authoritative evidence, the merits of arriving at such conclusions, based on mere indications, is itself questionable, since it seeks to question the rationale, prudence and existence of the activities of an entity without any credible basis. The point that there are no cash deposits in the accounts of the depositors but only bank transfers would further go to prove the genuineness of the transaction and negate, authoritatively and conclusively, the stand of the Ld. Assessing Officer.
(h) In the instant case, the Investors are duly incorporated under the provisions of Companies Act, 1956 (as in force at the relevant point of time) having respective separate legal entities and the status of an “Artificial Legal Person” as opposed to a natural person. The existence and identity of the said Companies stand corroborated by the certificates of incorporation granted by the jurisdictional Registrar of Companies, a statutory body entrusted with the tasks of over-seeing the implementation and compliance with the provisions of the Companies Act, 1956. In addition, the existence and the identity of the said companies also stood further supplemented by various documents filed before the Ld. Assessing Officer.
(i) The Companies have been incorporated by a due and rigorous process of law as laid down in the Companies Act, 1956 duly administered by the quasi-legal/administrative authorities, as laid out in the Companies Act, 1956 of which the jurisdictional Registrar of Companies acts as the fulcrum. In fact, in terms of the procedures laid down in the Companies Act, 1956, a rigorous process of verification and compliance has to be followed. Moreover, the entire functioning of companies incorporated under the Companies Act, is duly administered and regulated by the provisions of that Act, as in force at the relevant point of time, and the authorities created thereunder involving statutory/regulatory compliances such as regular and periodical filing of statutory documents as prescribed coupled with other powers such as investigation and inspection of the affairs of the Company.
(j) In this connection particular reference may be made to the provisions of Section 34 of the Companies Act, 1956 which read as follows:-
Section 34. Effect of registration – (1) On the registration of the memorandum of a company, the Registrar shall certify under his hand that the company is incorporated and, in the case of a limited company, that the company is limited. From the date of incorporation mentioned in the certificate of incorporation such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in this Act.
(k) The above section makes it clear that legally by definition and constitution a Limited Company is an incorporated body of persons whereby it is constituted into a distinct and independent person in law and is endowed with special rights and privileges. To this end it is distinguishable from a partnership firm which is the mere aggregate of its members whereas a company is in point of law a person distinct from its members. Accordingly, an incorporated body is an artificial person created by law, possessing a separate legal entity which can only be brought into existence and end by a due process of law and not in any other manner. In the instant case the statutory records available with the jurisdictional Registrar of Companies clearly point to the company being in existence and the same having not been extinguished by any process of law. As such any doubt as to the identity of the said companies’ stands dispelled and comprehensively negated.
(l) To this end, the argument of the Ld. Assessing Officer that the true identity of a Company is the business undertaken by it, is fallacious since while the business activities only reinforce the identity, they are specially in the case of a company only a reflection of what it is doing. The identity of a Company originates and derives from it being a “Separate Legal Entity” incorporated under the provisions of the Companies Act, as in force at the relevant point of time.
(m) It may also be noted that all the investors/depositors are Private Limited companies and their existence/identity has been clearly established by the documentary evidence (such as PAN/Bank statements/financial statements) in addition to their having been incorporated under the Companies Act, 1956 duly filed in the course of the assessment proceedings. It should be noted that the said evidences such as PAN/Bank statements are definite and concrete
ADDITION U/S 68 OF THE ACT
App. 6(B)
evidences of their existence and their having a separate existence. More particularly it should be noted that PAN is issued by the Income-tax Department only after certain requisite documents as to the identity/address are submitted which is duly followed by a due process of verification only after which is the PAN issued. Similarly bank accounts are opened only after following a set of procedures and practices as statutorily mandated by the Reserve Bank of India which are commonly referred to as the “KYC” (Know Your Customer) norms. As such to disregard the said documents on any ground whatsoever would amount to working a cross-purposes with the functioning of the Government apparatus, and in particular the Income-tax Department, of which the Ld. Assessing Officer is himself an integral part.
(n) It should also be noted that the fact of various companies having given accommodation entries to the Appellant Company has only been “suggested” and not proved, even conjecturally or tangentially. No positive/affirmative evidence has been brought on record to even suggest that the funds received by the Appellant Company represented unaccounted funds of the Appellant Company other than mere expressions/bland platitudinal statements indicating such a suspicion.
(o) The entire case of the Ld. Assessing Officer hinges upon the presumption that the Appellant Company has ploughed back its own unaccounted money in the form of the alleged accommodation entries. However, this presumption or suspicion needs to be corroborated by some concrete evidence to establish a link that the Appellant Company had ploughed back its unaccounted income through such means.
(p) It may again be emphasized that the entire amount has been received by the Appellant Company through normal banking channels by account payee cheques/demand drafts/electronic transfer. The evidence furnished clearly reveals the source of funds, particulars of the bank account through which payments had been received and the Income-tax particulars whereby the identity and creditworthiness of the lender is established authoritatively and conclusively and accordingly, no cause exists for a recourse to the provisions of Section 68. The Appellant Company has comprehensively discharged the onus cast upon it by Section 68 of the Income-tax Act, 1961 requiring it to prove the identity and creditworthiness of the parties and the genuineness of the transactions. It has furnished all requisite documentary evidence(s) possible within the realm of human endeavour and as envisaged by the statute in this regard. There is no direct or indirect or even conjectural evidence to disprove the transactions in any manner.
(q) The reasons furnished by the Ld. Assessing Officer in making the impugned addition are, to put it mildly, generic in nature and not backed by any concrete evidence or irrefutable logic. It should be noted that without unearthing any clinching evidence or backing his claim with irrefutable arguments, the Ld. Assessing Officer has merely proceeded to question, without any basis, a legally and correctly executed business transaction.
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r) As such the arguments, both legal and factual, advanced by the Ld. Assessing Officer fail to prove the allegation that the money used amounted to accommodation entries from paper companies based as it is on misplaced logic and an unsustainable interpretation of law.
(14) In particular with regard to the issue of establishing the creditworthiness of the parties, Your Honour’s attention is invited to the following judgments of the jurisdictional Delhi High Court wherein it has been conclusively held that as long as the identity of the Party was proved, the burden of proving the creditworthiness was not on the Appellant Company:CIT v. Dwarkadhish Investment Pvt. Ltd. and Dwarkadhish Capital Pvt. Ltd. [2011] 330 ITR 298 (Delhi); CIT v. Winstral Petrochemicals Pvt. Ltd. [2011] 330 ITR 603 (Delhi);
Commissioner of Income Tax v. Gangour Investment Ltd. [2011] 335 ITR 359 (Delhi);
(15) In the instant case Your Honour’s attention is invited to the decision of the Delhi High Court in the case of CIT v. Kamdhenu Steel & Alloys Limited [2012] 206 Taxman 254 (Delhi) wherein the following has been held:
“38. Even in that instant case, it is projected by the Revenue that the Directorate of Income Tax (Investigation) had purportedly found such a racket of floating bogus companies with sole purpose of landing entries. But, it is unfortunate that all this exercise is going in vain as few more steps which should have been taken by the Revenue in order to find out causal connection between the cash deposited in the bank accounts of the applicant banks and the assessee were not taken. It is necessary to link the assessee with the source when that link is missing, it is difficult to fasten the assessee with such a liability.
39. We may repeat what is often said, that a delicate balance has to be maintained while walking on the tight rope of sections 68 and 69 of the Act. On the one hand, no doubt, such kind of dubious practices are rampant, on the other hand, merely because there is an acknowledgement of such practices would not mean that in any of such cases coming before the Court, the Court has to presume that the assessee in questions as
indulged in that practice. To make the assessee responsible, there has to be proper evidence. It is equally important that an innocent person cannot be fastened with liability without cogent evidence. One has to see the matter from the point of view of such companies (like the assessee herein) who invite the share application money from different sources or even public at large. It would be asking for a moon if such companies are asked to find out from each and every share applicant/subscribers to first satisfy the assessee companies about the source of their funds before investing. It is for this reason the balance is struck by catena of judgments in laying down that the Department is not remediless and is free to proceed to reopen the individual assessment of such alleged bogus shareholders in accordance with the law. That was precisely the observation of the Supreme Court in Lovely Export (supra) which holds the fields and is binding.
40. In conclusion, we are of the opinion that once adequate evidence/ material is given, as stated by us above, which would prima facie discharge the burden of the assessee in proving the identity of shareholders, genuineness of the transaction and creditworthiness of the shareholders, thereafter in case such evidence is to be discarded or it is proved that it has “created” evidence, the Revenue is supposed to make thorough probe of the nature indicated above before it could nail the assessee and fasten the assessee with such a liability under Sections 68 and 69 of the Act.
(16) It should be noted that the Special Leave Petition field before the Hon’ble Supreme Court by the Revenue against the above decision of the Hon’ble Delhi High Court has been subsequently dismissed by their Lordships of the Supreme Court and as such the decision of the Delhi High Court in the case of CIT v. Kamdhenu Steel & Alloys Limited (supra) has attained conclusive judicial finality. The said views have also been echoed, reiterated and affirmed subsequently in the following cases:-
Commissioner of Income-tax v. Gangeshwari Metal (P.) Ltd. [2013] 30 taxmann.com 328 (Delhi);
Commissioner of Income Tax v. Jay Dee Securities & Finance Ltd [2013] 32 taxmann.com 91 (Allahabad);
(17) More particularly, Your Honour’s kind attention may be invited to the Delhi High Court judgment in the case of M/s Agson Global Private Limited [2022] 134 Taxmann.com 256 (Delhi) wherein it has been held that where there is no material on record to establish that unaccounted money has been funneled as share capital/premium, no addition can be made u/s 68 of the Income-tax Act 1961. In this connection, Your Honour’s kind attention is also be invited to the following judgments the findings wherein are relevant in the instant case : —
Where assessee produced on record document to establish genuineness such as their PAN, confirmations, Bank statements merely
because persons did not appear before Assessing Officer will not negate the case of the Assessee so as to invoke section 68.
CIT v. Orchid Industries Ltd. [2017] 397 ITR 136 (Bom.); SLP dismissed by the Supreme Court [2020] 116 taxmann.com 113 (SC)]
Where first appellate authority had returned a clear finding of fact that assessee had discharged its onus of proving identity of creditors, genuineness of transactions and credit worthiness of creditors which finding of fact stood affirmed by Tribunal and revenue had not been able to show any perversity in aforesaid findings of fact by authorities below, Tribunal was right in holding that no addition could be made under section 68.
PCIT-1 v. Ami Industries (India) Pvt. Ltd. [2020] 116 taxmann. com 34 (Bombay)
(18) (a) In the instant case there was no denial at any stage of the assessment proceedings by the party involved of their having invested to the Appellant Company and no evidence suggests the introduction of cash in any manner. Moreover there is no shred of evidence, direct, indirect or even peripheral of the said amount having emanated from the coffers of the Appellant Company. In view of the above, no doubt remains as to the identity of the Lender, their credit worthiness and the genuineness of the transactions and correspondingly no adverse inference is called for. As such given the emphatic affirmation of the transaction by the Depositor company no recourse can be had to the provisions of Section 68 on any ground.
(19) (a) In the facts of the subject case there is, if at all, a suspicion that the amounts received are allegedly unexplained. It is respectfully submitted that it is a settled law that suspicion, howsoever strong, cannot take place of proof and there can be no addition on the basis of mere suspicion. Reference, in this regard, may be made to the following decisions: -
Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC);
CIT v. Paras Cotton Co [2007] 288 ITR 211 (Raj.);
Faqir Chand Chaman Lal v. ACIT [2004] 1 SOT 914 (Asr.) [Appeal dismissed by P&H High Court in 262 ITR 295 and SLP dismissed by SC in 268 ITR 215 (St.)];
Assam Tea Co. v. ITO [2005] 92 ITD 85 (Asr.) (SB);
Jhantala Investments Limited v. ACIT [2000] 73 ITD 123 (Mum.)