I have given the Assessing Officer PAN, bank statements and ROC records for every share applicant — does Lovely Exports mean the addition under section 68 must go?
No, not where the department holds material linking you to admitted entry operators. The Delhi High Court held on 15 February 2012 that Lovely Exports applies where the assessee furnishes complete particulars and the Assessing Officer neither enquires into them nor holds material showing them to be false. It does not apply where the Assessing Officer has the statements of self-confessed accommodation entry providers whose companies are the very subscribers, and the assessee blocks every attempt to examine them. The Court also held the Tribunal wrong in law in requiring the Assessing Officer to prove the money came out of the assessee's own coffers. The addition of Rs.1,18,50,000 and the commission addition were restored.
Decided by the High Court (Delhi High Court; Sanjiv Khanna and R.V. Easwar JJ, judgment delivered by R.V. Easwar J) on 2012-02-15, reported as ITA No. 342 of 2011 (Delhi High Court). It bears on section 68, section 131 of the Income Tax Act 1961, in Cash Credits & Unexplained Money and Evidence & Burden of Proof matters.
This is the judgment that put boundaries around Lovely Exports, and it is cited in almost every share capital addition the department defends. It reads that order as resting on its facts — complete particulars furnished, no enquiry made — and refuses to extend it to a case where material implicates the assessee in a collusive arrangement. Three of its holdings do the heavy lifting. Payment by account payee cheque is at best neutral, because taking cash and returning a cheque is the modus operandi itself. Being on the Registrar of Companies' file is neutral, because every company must comply with those formalities. And section 68 casts no duty on the Assessing Officer to trace the source from which the assessee got the money, following A. Govindarajulu Mudaliar. Oasis Hospitalities marks the other side: there the assessee was never confronted with the investigation material.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2000-01 the assessee, a private limited company, returned a loss of Rs.2,800, which was accepted under section 143(1). In March 2006 the Assessing Officer received a letter from the Director of Income Tax (Investigation) naming sixteen entry operators who had given accommodation entries, with the assessee among the beneficiaries, and identifying Rs.1,18,50,000 received as share application money. The assessment was reopened. The Assessing Officer gave the assessee the statements of Mukesh Gupta and Rajan Jassal, printouts from the Investigation Wing's CD, and their letters admitting benami accounts. Summons to the two men were served but not complied with; summons to the subscriber companies came back unserved or unanswered; an Inspector found no such company at the addresses given. The assessee did not produce anyone, but filed affidavits from Gupta and Jassal retracting their statements. The Assessing Officer added Rs.1,18,50,000 under section 68 and Rs.2,96,250 as commission at 2.5 per cent. The Commissioner (Appeals) called for a remand report, then deleted both additions on the strength of PAN, ROC records, cheques and affidavits. The Tribunal upheld him on Lovely Exports, while rejecting the assessee's cross objection on reopening.
The Revenue's appeal was allowed. The substantial questions were answered in the negative and in favour of the department, and the assessee was made to pay costs of Rs.30,000. The Tribunal's order confirming deletion of the addition of Rs.1,18,50,000 under section 68 and the consequential addition of Rs.2,96,250 could not be upheld: its findings were based on irrelevant material or reached by ignoring relevant material. Receipt through account payee cheques was at best neutral, and in the light of the entry providers' admitted modus operandi it lost all force. Registration with the Registrar of Companies was equally neutral. Service of summons did not establish genuineness when the persons served would not appear. The Tribunal was wrong in law to require the Assessing Officer to prove that the money emanated from the assessee's own coffers; and in any event the material before him supported that inference.
The Court's first point is evidentiary. Fifteen of the twenty-two companies through which Gupta and Jassal admitted routing their entry operations had subscribed to the assessee's shares. That link, ignored by the Tribunal, was the fact requiring adjudication, and compliance with company law formalities did not answer it. The retraction affidavits could not be accepted as uncontroverted when the deponents never appeared to be examined, and the assessee's complaint that it was denied cross-examination lost its force the moment it produced their affidavits in its own favour. On law, section 68 permits the addition where the assessee offers no explanation of the nature and source of a credit or the explanation is unsatisfactory; it places no duty on the Assessing Officer to point to the source from which the assessee received the money. A. Govindarajulu Mudaliar decides that where an assessee fails to prove the source and nature of a receipt, the officer may infer that it is assessable. The Court then read Lovely Exports against the facts recorded in Divine Leasing. There the particulars were furnished, the assessee invited enquiry, and the Assessing Officer made none; the Supreme Court dismissed the special leave petition saying the department was free to reopen the subscribers' assessments. That ratio is confined to the question whether the assessee discharged its burden on identity, creditworthiness and genuineness, and to the rule that evidence cannot be thrown out without enquiry — the Orissa Corporation line. It does not reach a case where the Assessing Officer holds material discrediting the particulars and establishing a link with self-confessed entry providers, showing the subscription to be part of a pre-meditated smokescreen. Oasis Hospitalities was distinguished because there the officer had described the modus operandi generally without showing it applied, and had not confronted the assessee with the material.
The boundaries of the ratio cannot be, and should not be, widened to include therein cases where there exists material to implicate the assessee in a collusive arrangement with persons who are self-confessed "accommodation entry providers".
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Handle my notice → Ask a CA on WhatsAppNo, not where the department holds material linking you to admitted entry operators. The Delhi High Court held on 15 February 2012 that Lovely Exports applies where the assessee furnishes complete particulars and the Assessing Officer neither enquires into them nor holds material showing them to be false. It does not apply where the Assessing Officer has the statements of self-confessed accommodation entry providers whose companies are the very subscribers, and the assessee blocks every attempt to examine them. The Court also held the Tribunal wrong in law in requiring the Assessing Officer to prove the money came out of the assessee's own coffers. The addition of Rs.1,18,50,000 and the commission addition were restored. This was decided by the High Court (Delhi High Court; Sanjiv Khanna and R.V. Easwar JJ, judgment delivered by R.V. Easwar J) and bears on section 68, section 131 of the Income Tax Act 1961. It is reported as ITA No. 342 of 2011 (Delhi High Court). This is the judgment that put boundaries around Lovely Exports, and it is cited in almost every share capital addition the department defends. It reads that order as resting on its facts — complete particulars furnished, no enquiry made — and refuses to extend it to a case where material implicates the assessee in a collusive arrangement. Three of its holdings do the heavy lifting. Payment by account payee cheque is at best neutral, because taking cash and returning a cheque is the modus operandi itself. Being on the Registrar of Companies' file is neutral, because every company must comply with those formalities. And section 68 casts no duty on the Assessing Officer to trace the source from which the assessee got the money, following A. Govindarajulu Mudaliar. Oasis Hospitalities marks the other side: there the assessee was never confronted with the investigation material. If it applies to you, the first step is this: Produce the subscribers' directors when summoned; the assessee lost here because it could not explain why deponents who filed affidavits for it would not appear, and affidavits that are never tested carry little weight.
For assessment year 2000-01 the assessee, a private limited company, returned a loss of Rs.2,800, which was accepted under section 143(1). In March 2006 the Assessing Officer received a letter from the Director of Income Tax (Investigation) naming sixteen entry operators who had given accommodation entries, with the assessee among the beneficiaries, and identifying Rs.1,18,50,000 received as share application money. The assessment was reopened. The Assessing Officer gave the assessee the statements of Mukesh Gupta and Rajan Jassal, printouts from the Investigation Wing's CD, and their letters admitting benami accounts. Summons to the two men were served but not complied with; summons to the subscriber companies came back unserved or unanswered; an Inspector found no such company at the addresses given. The assessee did not produce anyone, but filed affidavits from Gupta and Jassal retracting their statements. The Assessing Officer added Rs.1,18,50,000 under section 68 and Rs.2,96,250 as commission at 2.5 per cent. The Commissioner (Appeals) called for a remand report, then deleted both additions on the strength of PAN, ROC records, cheques and affidavits. The Tribunal upheld him on Lovely Exports, while rejecting the assessee's cross objection on reopening. The matter was decided on 2012-02-15 by the High Court (Delhi High Court; Sanjiv Khanna and R.V. Easwar JJ, judgment delivered by R.V. Easwar J). On those facts the High Court held as follows. The Revenue's appeal was allowed. The substantial questions were answered in the negative and in favour of the department, and the assessee was made to pay costs of Rs.30,000. The Tribunal's order confirming deletion of the addition of Rs.1,18,50,000 under section 68 and the consequential addition of Rs.2,96,250 could not be upheld: its findings were based on irrelevant material or reached by ignoring relevant material. Receipt through account payee cheques was at best neutral, and in the light of the entry providers' admitted modus operandi it lost all force. Registration with the Registrar of Companies was equally neutral. Service of summons did not establish genuineness when the persons served would not appear. The Tribunal was wrong in law to require the Assessing Officer to prove that the money emanated from the assessee's own coffers; and in any event the material before him supported that inference.
The Court's first point is evidentiary. Fifteen of the twenty-two companies through which Gupta and Jassal admitted routing their entry operations had subscribed to the assessee's shares. That link, ignored by the Tribunal, was the fact requiring adjudication, and compliance with company law formalities did not answer it. The retraction affidavits could not be accepted as uncontroverted when the deponents never appeared to be examined, and the assessee's complaint that it was denied cross-examination lost its force the moment it produced their affidavits in its own favour. On law, section 68 permits the addition where the assessee offers no explanation of the nature and source of a credit or the explanation is unsatisfactory; it places no duty on the Assessing Officer to point to the source from which the assessee received the money. A. Govindarajulu Mudaliar decides that where an assessee fails to prove the source and nature of a receipt, the officer may infer that it is assessable. The Court then read Lovely Exports against the facts recorded in Divine Leasing. There the particulars were furnished, the assessee invited enquiry, and the Assessing Officer made none; the Supreme Court dismissed the special leave petition saying the department was free to reopen the subscribers' assessments. That ratio is confined to the question whether the assessee discharged its burden on identity, creditworthiness and genuineness, and to the rule that evidence cannot be thrown out without enquiry — the Orissa Corporation line. It does not reach a case where the Assessing Officer holds material discrediting the particulars and establishing a link with self-confessed entry providers, showing the subscription to be part of a pre-meditated smokescreen. Oasis Hospitalities was distinguished because there the officer had described the modus operandi generally without showing it applied, and had not confronted the assessee with the material. In the words reproduced by the source cited on this page: "The boundaries of the ratio cannot be, and should not be, widened to include therein cases where there exists material to implicate the assessee in a collusive arrangement with persons who are self-confessed "accommodation entry providers"."
It was decided by the High Court on 2012-02-15 and is reported as ITA No. 342 of 2011 (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 131, 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 Revenue's appeal was allowed. The substantial questions were answered in the negative and in favour of the department, and the assessee was made to pay costs of Rs.30,000. The Tribunal's order confirming deletion of the addition of Rs.1,18,50,000 under section 68 and the consequential addition of Rs.2,96,250 could not be upheld: its findings were based on irrelevant material or reached by ignoring relevant material. Receipt through account payee cheques was at best neutral, and in the light of the entry providers' admitted modus operandi it lost all force. Registration with the Registrar of Companies was equally neutral. Service of summons did not establish genuineness when the persons served would not appear. The Tribunal was wrong in law to require the Assessing Officer to prove that the money emanated from the assessee's own coffers; and in any event the material before him supported that inference. It arises in Cash Credits & Unexplained Money and Evidence & Burden of Proof matters, on section 68, section 131 of the Income Tax Act 1961, and was decided by Delhi High Court; Sanjiv Khanna and R.V. Easwar JJ, judgment delivered by R.V. Easwar 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. Do not rest the case on cheques, PAN and ROC records alone — this judgment treats all three as neutral once there is material on modus operandi. Ask for the investigation material and the statements, and take cross-examination if it is refused; the distinction drawn from Oasis Hospitalities turns on whether the assessee was confronted with the material and given that opportunity. If the department relies only on a general description of how entry operators work, without showing a link to your subscribers, press that gap — the Court accepted it as decisive in the cases it placed in the Orissa Corporation category.
Validity check could not be completed. A Delhi High Court Division Bench judgment of 15 February 2012, marked for reporting. Only the judgment text was before me; I made no citator check and cannot say whether it was carried further or how later Benches have treated it. Section 68 has since been amended to require the resident share applicant's own source to be explained, which strengthens the department's position beyond what this judgment decides. 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 harvested text is clipped: about 25,700 characters from the middle are missing, covering the substantial questions as framed, the arguments of both sides, and the first part of the Court's analysis — roughly paragraphs 17 to 28. The facts, the orders below, and the whole of the Court's reasoning from the discussion of the affidavits at paragraph 28 to the order at paragraph 42 are present. Two smaller points. The source printed no reporter citations, so the case number is used. And the batch line listed section 132(4); nothing in the surviving text turns on it — the statements relied on were recorded under section 131 by the Investigation Wing, and there was no search on this assessee — so section 131 is listed instead. 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 Revenue's appeal was allowed. The substantial questions were answered in the negative and in favour of the department, and the assessee was made to pay costs of Rs.30,000. The Tribunal's order confirming deletion of the addition of Rs.1,18,50,000 under section 68 and the consequential addition of Rs.2,96,250 could not be upheld: its findings were based on irrelevant material or reached by ignoring relevant material. Receipt through account payee cheques was at best neutral, and in the light of the entry providers' admitted modus operandi it lost all force. Registration with the Registrar of Companies was equally neutral. Service of summons did not establish genuineness when the persons served would not appear. The Tribunal was wrong in law to require the Assessing Officer to prove that the money emanated from the assessee's own coffers; and in any event the material before him supported that inference.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
You have a document that says so. Does that settle it?
If the department doubts my shareholders, can it add the money to my income?
You gave particulars, paid by cheque and got a confirmation. Has the burden shifted?
Can the whole of a bogus purchase be added, rather than a percentage?