Addition for accommodation entries merely based on statement of investors ignoring documents furnished invalid-High Court

Addition for accommodation entries merely based on statement of investors and without controverting the documents furnished invalid-High Court

The additions on account of accommodation entries have been a common feature in income tax proceedings which have attracted litigation.

A typical modus operandi adopted by the receiver of the such bogus/accommodation entries is to deposit cash in the account of a person and subsequently receive it back in the form of loan, gift, share application money etc.

The addition is justified in cases where the assessee fails to discharge the preliminary onus of proving the genuineness, creditworthiness and identity of the person advancing moneys. Once the assessee reasonably discharges the said onus, it shifts to the Revenue. In such cases, no addition for alleged bogus accommodation entries can be made unless the Revenue is able to controvert the defence advanced by the assessee in this regard.

On the instant case, a controversy arose as to whether Revenue can make an addition on account of bogus/accommodation entries based on statements of directors of the companies who made the deposits, ignoring the documents furnished by the assessee to support that the entries were genuine.

Addition for accommodation entries

ABCAUS Case Law Citation:
ABCAUS 2164 (2018) (01) HC

The Challenge/Grievance:
The Revenue was aggrieved by an order of the Income Tax Appellate Tribunal (ITAT) confirming the order of the CIT(A) who had set aside addition on account of bogus share application money made under Section 68 of the Income Tax Act, 1961 (Act).

Important Case Laws Cited/relied upon by the parties:
CIT v. Lovely Exports P. Ltd. 216 ITR 195 (SC)
Addl. CIT v. Hanuman Pd. Aggarwal 151 ITR 151 (Parna)
Steller Investment Ltd. (2001) 251 ITR 263 (SC)
Divine Leasing & Finance Ltd. (2008) 299 ITR 268 (Del),
CIT vs. Lovely Exports Pvt. Ltd. (2008) 299 ITR 268 (Del)

Brief Facts of the Case:
The respondent assessee company had received Rs. 5 crores as share application money from various five parties. During the course of assessment proceedings, the Assessing Officer (AO) due to large amounts of share application money, required the assessee to furnish particulars of the same.

The assessee inter alia provided details relating to the share application money provided by each of the entities – confirmation letters; board resolutions from each company; PAN card details; copies of the Memorandum and Articles of Association; Forms 18 and 32 and audited financial statements; copies of pay orders which were used for the share application money. In addition, affidavits of Directors and share investors were also furnished.

However, the AO was not satisfied with the materials furnished and held that the assessee had not discharged the onus/burden of proving the genuineness of the identity of the applicants, the genuineness of the transactions or the creditworthiness of the investors as required by the decision of the Supreme Court.

Aggrieved, the assessee appealed to the CIT(A) who examined all the materials afresh and held that documents pertaining to the share applicant companies provided by the assessee were neither examined nor controverted by the AO while confirming the assessment. The CIT(A) was of the opinion that the AO gave undue importance to the statements given by the directors of investor companies. Even the opportunity of cross-examination was not provided to the assessee.

The CIT(A) relied on the judgment(s) of Delhi High Court, where it was held that once the identify of the share holder has been established, even if there is a case of bogus share capital, it can not be added in the hands of the company unless any adverse evidence is no record. The Delhi High Court had laid down the law on the subject as to what is the extent of the burden that lies on the assessee to prove the cash credit in the share of share capital. The Hon’ble Court held that if the relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with the copies of share holder’s register, share application money forms, share transfer register, etc, it would constitute an acceptable proof or acceptable explanation by the assessee. The Department would not be justified in drawing an adverse inference only because the creditors/subscribers fails or neglects to respond to its notices. The onus would not stand discharged if the creditors/subscriber denies or repudiates the transaction set up by the assessee.

The ITAT, re-examined the materials afresh and affirmed the findings of the CIT(A). The Tribunal held that the assessee discharged its onus by producing all the documents showing the genuineness, creditworthiness and identity of the share subscriber. The AO had not produced anything on record to show how the share application money was tainted money of the assessee company which was routed through the share subscriber company. The ITAT added that mere denial by director of share investor company would not ipso facto lead to the conclusion that the transaction was hit by Section 68 of the Act.

Observations made by the High Court:
The Hon’ble High Court opined that the lone circumstance of a Director disowning the document per se could not have constituted a fresh material to reject the documentary evidence.

The High Court observed that, in the instant case, the existence of the company as an income tax assessee, and that it had furnished audited accounts was not in dispute. Furthermore, its bank details too were furnished to the AO. Therefore, if the AO were to conduct his task diligently, he ought to have at least sought the material by way of bank statements etc. to discern whether in fact the amounts were infused into the share holder’s account in cash at any point of time or that the amounts were such as to be beyond their means.

In the absence of any such enquiry, the High Court opined that the findings holding that the assessee had not discharged the onus placed upon it by law cannot be considered unreasonable.

Decision/ Conclusion/Held:
Appeal of the Revenue dismissed holding that no question of law had arisen.

Addition for accommodation entries

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