I have produced the share subscribers' incorporation certificates, PAN cards, bank statements and confirmations — is that enough to discharge my onus under section 68?
Not necessarily. The Delhi High Court held that certificates of incorporation and PAN establish existence on paper but have their limitation where there is material showing the subscriber was a paper company and not a genuine investor. Identity, creditworthiness and genuineness must be tested in depth, having regard to human probabilities and the normal course of human conduct, not superficially. Creditworthiness is not proved by a cheque or a bank statement where the account merely shows cash deposited and cheques issued out. The Tribunal's order upholding deletion of a Rs 54 lakh addition was set aside and the matter remitted for fresh decision.
Decided by the High Court (High Court of Delhi — Sanjiv Khanna and V. Kameswar Rao JJ (judgment by Sanjiv Khanna J)) on 2014-08-25, reported as ITA No. 320/2012 (Delhi High Court). It bears on section 68, section 147, section 148 of the Income Tax Act 1961, in Cash Credits & Unexplained Money and Evidence & Burden of Proof matters.
This is the case the Department cites to answer the standard paperwork defence, and it is candid about there being two lines of authority. Where the assessee has produced the documents and no further inquiry followed, the addition fails; where there is material showing the subscriber is a paper company with no source of income that has nevertheless made a large investment, the documents do not carry the day. It also settles several practical points against the assessee: section 68 places no duty on the Assessing Officer to show where the money came from, following A. Govindarajulu Mudaliar; the assessee cannot furnish details and go quiet when summons to shareholders return unserved; and no universal rule requires an inspector to be deputed or addresses to be traced from the Registrar of Companies. Read it alongside Lovely Exports, which it does not displace but confines.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2002-03 the assessee company returned a loss of Rs 1,58,035, processed under section 143(1). On a report from the Investigation Wing that it had received accommodation entries as share application money, capital and premium, notice under sections 147 and 148 was served on 25 March 2009 and reasons were supplied on 2 September 2009. Through the assessment the assessee sought repeated adjournments and attended only in part; it was asked for details of the shareholders allotted shares, their confirmations, returns, bank accounts, share certificates and allotment letters. It objected that the reasons were surmises, denied five entries aggregating Rs 47 lakh that appeared twice in the Investigation Wing's list, but accepted six credits totalling Rs 54,00,000 received in March 2002 from six named companies. Summons under section 131 to the alleged shareholders came back unserved in five cases, and the assessee, asked for current addresses, said on 14 December 2009 that it could not produce the directors or principal officers because they were no longer shareholders and seven years had passed. The Assessing Officer obtained the subscribers' bank statements, which showed large cash deposits followed by pay orders and cheques to the assessee, and recorded that the companies were controlled by one Mahesh Garg and his group. He added Rs 54,00,000 under section 68 and Rs 1,08,000 as 2 per cent commission. The Commissioner (Appeals) deleted the additions on merits, holding the documents — share application forms, subscribers' bank statements, confirmations, certificates of incorporation with memorandum and articles, PAN cards and returns — proved identity and genuineness, while upholding the reopening. The Tribunal dismissed the Revenue's appeal on 31 October 2011, largely reproducing the Commissioner (Appeals)' order and relying on its own coordinate bench decision in MAF Academy, and disposed of the assessee's cross-objections on reopening as infructuous.
The substantial question of law was answered in favour of the Revenue and against the assessee, and the matter was remitted to the Tribunal to decide the whole issue afresh in the light of the case law discussed. The three primary requirements — identification of the creditor or shareholder, creditworthiness of the creditor or shareholder, and genuineness of the transaction — must be tested not superficially but in depth, having regard to human probabilities and the normal course of human conduct. A certificate of incorporation and a PAN are relevant for identification but have their limitation where there is evidence that the subscriber was a paper company and not a genuine investor; PAN is allotted on application without de facto verification of identity or of active business. Creditworthiness is not proved by showing the issue and receipt of a cheque or by furnishing a bank statement, where circumstances call for positive evidence that the subscriber made a genuine investment. The Tribunal had merely reproduced the Commissioner (Appeals)' order, had relied on its coordinate bench decision in MAF Academy which the High Court had since overturned, and had accepted both that the assessee could not produce the directors and that the Assessing Officer's bank enquiries raised genuine concerns. A further reason for remitting rather than deciding on merits was that the assessee's cross-objections on the reopening, dismissed as infructuous, would revive.
The Court began by acknowledging two sets of cases decided on their own facts: those where the assessee produced identity documents, bank details and confirmations and no further inquiry was made, and those where there was evidence that the shareholder was a paper company with no source of income which had nevertheless made substantial share investments, and where the Assessing Officer had examined the bank statements, the financial position of subscriber and beneficiary and the surrounding circumstances. In the second class the documents do not conclude the matter. That approach follows Durga Prasad More, where the Supreme Court held that the apparent must be considered real only until there is reason to believe otherwise, that a party relying on recitals must establish their truth, and that the taxing authorities are not required to put on blinkers but may look at surrounding circumstances. On the burden, the Court applied Nova Promoters, which in turn applied A. Govindarajulu Mudaliar: section 68 permits the addition where no explanation is offered or the explanation is unsatisfactory, and places no duty on the Assessing Officer to point to the source from which the assessee received the money. From N.R. Portfolio the Court took the content of 'identity' — the place of work, the staff, actual carrying on of business and recognition in the eyes of the public, rather than a PAN or assessment particulars — and the significance of subscribers who have no profit-making apparatus and merely rotate money through accounts fed by cash, and of beneficiaries who pay no dividend or interest, so that the profit motive normal to an investment is absent. The Court added its own practical observations: subscribers do not become incommunicado after payment, since call money, dividends and warrants keep the relationship alive, so an assessee cannot furnish details and stay silent when summons go unserved; equally, no universal rule requires an inspector to be sent or addresses to be traced from the Registrar of Companies' website. The final conclusion must be pragmatic and practical, taking a holistic view of the evidence including the difficulties an assessee may face.
Certificate of incorporation, PAN number etc. are relevant for purchase of identification, but have their limitation when there is evidence and material to show that the subscriber was a paper company and not a genuine investor.
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Handle my notice → Ask a CA on WhatsAppNot necessarily. The Delhi High Court held that certificates of incorporation and PAN establish existence on paper but have their limitation where there is material showing the subscriber was a paper company and not a genuine investor. Identity, creditworthiness and genuineness must be tested in depth, having regard to human probabilities and the normal course of human conduct, not superficially. Creditworthiness is not proved by a cheque or a bank statement where the account merely shows cash deposited and cheques issued out. The Tribunal's order upholding deletion of a Rs 54 lakh addition was set aside and the matter remitted for fresh decision. This was decided by the High Court (High Court of Delhi — Sanjiv Khanna and V. Kameswar Rao JJ (judgment by Sanjiv Khanna J)) and bears on section 68, section 147, section 148 of the Income Tax Act 1961. It is reported as ITA No. 320/2012 (Delhi High Court). This is the case the Department cites to answer the standard paperwork defence, and it is candid about there being two lines of authority. Where the assessee has produced the documents and no further inquiry followed, the addition fails; where there is material showing the subscriber is a paper company with no source of income that has nevertheless made a large investment, the documents do not carry the day. It also settles several practical points against the assessee: section 68 places no duty on the Assessing Officer to show where the money came from, following A. Govindarajulu Mudaliar; the assessee cannot furnish details and go quiet when summons to shareholders return unserved; and no universal rule requires an inspector to be deputed or addresses to be traced from the Registrar of Companies. Read it alongside Lovely Exports, which it does not displace but confines. If it applies to you, the first step is this: Go past the paperwork: assemble evidence that the subscriber has a real business — premises, staff, its own profit-making apparatus — because incorporation and PAN alone are treated as documentation, not identity.
For assessment year 2002-03 the assessee company returned a loss of Rs 1,58,035, processed under section 143(1). On a report from the Investigation Wing that it had received accommodation entries as share application money, capital and premium, notice under sections 147 and 148 was served on 25 March 2009 and reasons were supplied on 2 September 2009. Through the assessment the assessee sought repeated adjournments and attended only in part; it was asked for details of the shareholders allotted shares, their confirmations, returns, bank accounts, share certificates and allotment letters. It objected that the reasons were surmises, denied five entries aggregating Rs 47 lakh that appeared twice in the Investigation Wing's list, but accepted six credits totalling Rs 54,00,000 received in March 2002 from six named companies. Summons under section 131 to the alleged shareholders came back unserved in five cases, and the assessee, asked for current addresses, said on 14 December 2009 that it could not produce the directors or principal officers because they were no longer shareholders and seven years had passed. The Assessing Officer obtained the subscribers' bank statements, which showed large cash deposits followed by pay orders and cheques to the assessee, and recorded that the companies were controlled by one Mahesh Garg and his group. He added Rs 54,00,000 under section 68 and Rs 1,08,000 as 2 per cent commission. The Commissioner (Appeals) deleted the additions on merits, holding the documents — share application forms, subscribers' bank statements, confirmations, certificates of incorporation with memorandum and articles, PAN cards and returns — proved identity and genuineness, while upholding the reopening. The Tribunal dismissed the Revenue's appeal on 31 October 2011, largely reproducing the Commissioner (Appeals)' order and relying on its own coordinate bench decision in MAF Academy, and disposed of the assessee's cross-objections on reopening as infructuous. The matter was decided on 2014-08-25 by the High Court (High Court of Delhi — Sanjiv Khanna and V. Kameswar Rao JJ (judgment by Sanjiv Khanna J)). On those facts the High Court held as follows. The substantial question of law was answered in favour of the Revenue and against the assessee, and the matter was remitted to the Tribunal to decide the whole issue afresh in the light of the case law discussed. The three primary requirements — identification of the creditor or shareholder, creditworthiness of the creditor or shareholder, and genuineness of the transaction — must be tested not superficially but in depth, having regard to human probabilities and the normal course of human conduct. A certificate of incorporation and a PAN are relevant for identification but have their limitation where there is evidence that the subscriber was a paper company and not a genuine investor; PAN is allotted on application without de facto verification of identity or of active business. Creditworthiness is not proved by showing the issue and receipt of a cheque or by furnishing a bank statement, where circumstances call for positive evidence that the subscriber made a genuine investment. The Tribunal had merely reproduced the Commissioner (Appeals)' order, had relied on its coordinate bench decision in MAF Academy which the High Court had since overturned, and had accepted both that the assessee could not produce the directors and that the Assessing Officer's bank enquiries raised genuine concerns. A further reason for remitting rather than deciding on merits was that the assessee's cross-objections on the reopening, dismissed as infructuous, would revive.
The Court began by acknowledging two sets of cases decided on their own facts: those where the assessee produced identity documents, bank details and confirmations and no further inquiry was made, and those where there was evidence that the shareholder was a paper company with no source of income which had nevertheless made substantial share investments, and where the Assessing Officer had examined the bank statements, the financial position of subscriber and beneficiary and the surrounding circumstances. In the second class the documents do not conclude the matter. That approach follows Durga Prasad More, where the Supreme Court held that the apparent must be considered real only until there is reason to believe otherwise, that a party relying on recitals must establish their truth, and that the taxing authorities are not required to put on blinkers but may look at surrounding circumstances. On the burden, the Court applied Nova Promoters, which in turn applied A. Govindarajulu Mudaliar: section 68 permits the addition where no explanation is offered or the explanation is unsatisfactory, and places no duty on the Assessing Officer to point to the source from which the assessee received the money. From N.R. Portfolio the Court took the content of 'identity' — the place of work, the staff, actual carrying on of business and recognition in the eyes of the public, rather than a PAN or assessment particulars — and the significance of subscribers who have no profit-making apparatus and merely rotate money through accounts fed by cash, and of beneficiaries who pay no dividend or interest, so that the profit motive normal to an investment is absent. The Court added its own practical observations: subscribers do not become incommunicado after payment, since call money, dividends and warrants keep the relationship alive, so an assessee cannot furnish details and stay silent when summons go unserved; equally, no universal rule requires an inspector to be sent or addresses to be traced from the Registrar of Companies' website. The final conclusion must be pragmatic and practical, taking a holistic view of the evidence including the difficulties an assessee may face. In the words reproduced by the source cited on this page: "Certificate of incorporation, PAN number etc. are relevant for purchase of identification, but have their limitation when there is evidence and material to show that the subscriber was a paper company and not a genuine investor."
It was decided by the High Court on 2014-08-25 and is reported as ITA No. 320/2012 (Delhi High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 68, section 147, section 148, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The substantial question of law was answered in favour of the Revenue and against the assessee, and the matter was remitted to the Tribunal to decide the whole issue afresh in the light of the case law discussed. The three primary requirements — identification of the creditor or shareholder, creditworthiness of the creditor or shareholder, and genuineness of the transaction — must be tested not superficially but in depth, having regard to human probabilities and the normal course of human conduct. A certificate of incorporation and a PAN are relevant for identification but have their limitation where there is evidence that the subscriber was a paper company and not a genuine investor; PAN is allotted on application without de facto verification of identity or of active business. Creditworthiness is not proved by showing the issue and receipt of a cheque or by furnishing a bank statement, where circumstances call for positive evidence that the subscriber made a genuine investment. The Tribunal had merely reproduced the Commissioner (Appeals)' order, had relied on its coordinate bench decision in MAF Academy which the High Court had since overturned, and had accepted both that the assessee could not produce the directors and that the Assessing Officer's bank enquiries raised genuine concerns. A further reason for remitting rather than deciding on merits was that the assessee's cross-objections on the reopening, dismissed as infructuous, would revive. It arises in Cash Credits & Unexplained Money and Evidence & Burden of Proof matters, on section 68, section 147, section 148 of the Income Tax Act 1961, and was decided by High Court of Delhi — Sanjiv Khanna and V. Kameswar Rao JJ (judgment by Sanjiv Khanna J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Keep the relationship with subscribers alive and their current addresses on file; the Court held that a shareholder does not become incommunicado after paying, and unserved summons reflect on genuineness. Explain the pattern in the subscriber's bank account if cash was deposited shortly before the cheque issued, since that pattern by itself defeats creditworthiness here. Deal with the absence of dividend, interest or any return to the subscriber, which the Court treated as a material indicator that the investment was not genuine.
Validity check could not be completed. Heavily cited — the source page records over 130 citing decisions — and it applies the Delhi High Court's own line in Nova Promoters, N.R. Portfolio and MAF Academy together with Durga Prasad More and A. Govindarajulu Mudaliar. It does not purport to depart from Lovely Exports. Whether the Supreme Court has since dealt with an appeal from this judgment, and how the Tribunal decided on remand, were not checked; no later authority was read. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment decides no final outcome on the addition: the question of law was answered for the Revenue but the whole issue, including the reopening challenge in the revived cross-objections, went back to the Tribunal. What happened on remand is not known. The Court itself records that the authorities fall into two lines depending on their facts, so the case is a guide to how the three ingredients are to be tested rather than a rule that documents never suffice. No reporter citation is carried by the source, so the appeal number is given instead. Sections 147 and 148 are listed because the reopening was in issue and remains to be decided, though the Court did not construe them. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The substantial question of law was answered in favour of the Revenue and against the assessee, and the matter was remitted to the Tribunal to decide the whole issue afresh in the light of the case law discussed. The three primary requirements — identification of the creditor or shareholder, creditworthiness of the creditor or shareholder, and genuineness of the transaction — must be tested not superficially but in depth, having regard to human probabilities and the normal course of human conduct. A certificate of incorporation and a PAN are relevant for identification but have their limitation where there is evidence that the subscriber was a paper company and not a genuine investor; PAN is allotted on application without de facto verification of identity or of active business. Creditworthiness is not proved by showing the issue and receipt of a cheque or by furnishing a bank statement, where circumstances call for positive evidence that the subscriber made a genuine investment. The Tribunal had merely reproduced the Commissioner (Appeals)' order, had relied on its coordinate bench decision in MAF Academy which the High Court had since overturned, and had accepted both that the assessee could not produce the directors and that the Assessing Officer's bank enquiries raised genuine concerns. A further reason for remitting rather than deciding on merits was that the assessee's cross-objections on the reopening, dismissed as infructuous, would revive.
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My return was only processed under 143(1). Does that stop the department reopening it later?
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A reassessment was done in between. Does the two-year clock for s.263 restart from it?