I have PAN cards, bank statements, ROC filings and confirmations for every share subscriber. Can the Assessing Officer still add the share capital under section 68?
Yes, where there is material showing the subscribers are paper companies. The Delhi High Court set aside the Tribunal and restored an addition of Rs.1,51,50,000 under section 68 for assessment year 2008-09. Five subscriber companies shared one address, were run by an entry operator whose search had produced statements from his employee-directors and auditors, and the assessee had no business and no assets yet issued Rs.10 shares at Rs.40 premium. The Court held the transactions were sham and make-believe with excellent paper work to camouflage their bogus nature, and that the Tribunal's approach was superficial and contrary to human probabilities.
Decided by the High Court (High Court of Delhi at New Delhi; Sanjiv Khanna and Anup Jairam Bhambhani, JJ (judgment by Sanjiv Khanna, J)) on 2019-01-17, reported as ITA 49/2018 (Delhi High Court). It bears on section 68, section 260A of the Income Tax Act 1961, in Cash Credits & Unexplained Money and Evidence & Burden of Proof matters.
This is the Delhi High Court's working rule for separating the two lines of section 68 share capital cases, and it is the one the Department leads with. Applying the classification in Navodaya Castles, the Court divides the authorities: where the assessee files its documents and the Assessing Officer then does nothing, the addition fails; where there is evidence that the subscriber is a paper company with no source of income yet makes a substantial investment, and the officer has probed the bank statements, the beneficiary's own financial position and the surrounding circumstances, the addition stands. It confirms that a certificate of incorporation and a PAN go to identity only and have their limitation once there is material that the subscriber is not a genuine investor, and that section 68 places no duty on the officer to trace the money back to the assessee's own coffers. It also treats an unexplained share premium and a failure to produce directors who had already sent confirmations as part of the probability picture.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2008-09 the assessee received Rs.168 lakhs as share capital and premium from seven companies. The dispute concerned Rs.1,51,50,000 from five of them, all at the same address at 13/34 WEA, Main Arya Samaj Road, Karol Bagh. A search under section 132 on Tarun Goyal, a chartered accountant, had shown that he had set up about 90 companies at that address for accommodation entries: the directors were his employees, working as peons and receptionists, who admitted signing papers on his direction; his auditors said they had never met the directors and audited on his instructions; the passbooks, cheque books and PAN cards were in his possession, the bank opening forms appeared to be in his handwriting, and the books were retrieved from his computers. The Assessing Officer asked the assessee to produce the subscribers' directors and to give particulars of how the dealings began, how applications and share certificates were exchanged, and whether AGM notices were sent. The assessee produced ledgers, bank statements, balance sheets, share application forms, ROC returns, Form No. 2, affidavits, PANs, board resolutions and confirmations, but no directors and none of the other particulars. Its own accounts showed no business income and no fixed assets, receipts of Rs.16.38 lakhs and expenditure of Rs.12.17 lakhs in the year, yet Rs.10 shares were issued at a premium of Rs.40. The Commissioner (Appeals) deleted the addition and the Tribunal upheld the deletion.
The Revenue's appeal under section 260A was allowed and the substantial question answered in its favour. The addition of Rs.1,51,50,000 under section 68 was restored. The Court held that the case fell in the category where the Assessing Officer had not kept quiet but had made enquiries and put specific queries to the assessee, and that the Tribunal had ignored the material before it - the common address of the five subscribers, the size of the investment, the search material on Tarun Goyal and the accommodation entry operation, the findings extracted in the assessment order, the assessee's own lack of business or expenditure, the unexplained premium of Rs.40 on a Rs.10 share, and the failure to produce directors who had already filed confirmations. On that factual position the Court held without hesitation that the transactions were sham and make-believe with excellent paper work to camouflage their bogus nature, that the Tribunal's order was superficial and perfunctory, and that its reasoning was contrary to human probabilities because no one invests such amounts without concern for return and safety.
The Court's method was to place the case within the classification made in CIT v Navodaya Castles Pvt Ltd. There are two sets of section 68 share capital cases, each turning on its own facts. In the first, the assessee produces documents establishing the shareholders' identity, the bank accounts and the banking channel, with affidavits or confirmations, and the officer then makes no further enquiry; the addition cannot stand, as Rakam Money Matters and Victor Electrodes show. In the second, there is evidence that the subscriber is a paper company with no source of income which has nevertheless made a substantial investment, and the officer has examined the bank statements, the financial position of the beneficiary and the surrounding circumstances. In that second class the three requirements - identification, creditworthiness and genuineness - 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 go to identification and have their limitation once there is material that the subscriber is a paper company, the Court applying Durga Prasad More for the proposition that the apparent need not be taken as real and that the taxing authorities are not required to put on blinkers. Through the extract from Nova Promoters the Court also rejected the Tribunal's premise that the officer had to prove that the money emanated from the assessee's own coffers: section 68 permits an addition where the explanation of the nature and source of the credit is absent or unsatisfactory, and places no duty on the officer to identify the source, as Govindarajulu Mudaliar had settled. Applying that framework, the Court found that the officer here had enquired and that the Tribunal had simply not engaged with what he found.
the transactions in question were clearly sham and make-believe with excellent paper work to camouflage their bogus nature
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Handle my notice → Ask a CA on WhatsAppYes, where there is material showing the subscribers are paper companies. The Delhi High Court set aside the Tribunal and restored an addition of Rs.1,51,50,000 under section 68 for assessment year 2008-09. Five subscriber companies shared one address, were run by an entry operator whose search had produced statements from his employee-directors and auditors, and the assessee had no business and no assets yet issued Rs.10 shares at Rs.40 premium. The Court held the transactions were sham and make-believe with excellent paper work to camouflage their bogus nature, and that the Tribunal's approach was superficial and contrary to human probabilities. This was decided by the High Court (High Court of Delhi at New Delhi; Sanjiv Khanna and Anup Jairam Bhambhani, JJ (judgment by Sanjiv Khanna, J)) and bears on section 68, section 260A of the Income Tax Act 1961. It is reported as ITA 49/2018 (Delhi High Court). This is the Delhi High Court's working rule for separating the two lines of section 68 share capital cases, and it is the one the Department leads with. Applying the classification in Navodaya Castles, the Court divides the authorities: where the assessee files its documents and the Assessing Officer then does nothing, the addition fails; where there is evidence that the subscriber is a paper company with no source of income yet makes a substantial investment, and the officer has probed the bank statements, the beneficiary's own financial position and the surrounding circumstances, the addition stands. It confirms that a certificate of incorporation and a PAN go to identity only and have their limitation once there is material that the subscriber is not a genuine investor, and that section 68 places no duty on the officer to trace the money back to the assessee's own coffers. It also treats an unexplained share premium and a failure to produce directors who had already sent confirmations as part of the probability picture. If it applies to you, the first step is this: Do not rest on the paper set. Be ready to explain why a stranger paid a large premium for shares in a company with no business, no assets and negligible income - the Court treats an unexplained premium as a sharp indicator.
For assessment year 2008-09 the assessee received Rs.168 lakhs as share capital and premium from seven companies. The dispute concerned Rs.1,51,50,000 from five of them, all at the same address at 13/34 WEA, Main Arya Samaj Road, Karol Bagh. A search under section 132 on Tarun Goyal, a chartered accountant, had shown that he had set up about 90 companies at that address for accommodation entries: the directors were his employees, working as peons and receptionists, who admitted signing papers on his direction; his auditors said they had never met the directors and audited on his instructions; the passbooks, cheque books and PAN cards were in his possession, the bank opening forms appeared to be in his handwriting, and the books were retrieved from his computers. The Assessing Officer asked the assessee to produce the subscribers' directors and to give particulars of how the dealings began, how applications and share certificates were exchanged, and whether AGM notices were sent. The assessee produced ledgers, bank statements, balance sheets, share application forms, ROC returns, Form No. 2, affidavits, PANs, board resolutions and confirmations, but no directors and none of the other particulars. Its own accounts showed no business income and no fixed assets, receipts of Rs.16.38 lakhs and expenditure of Rs.12.17 lakhs in the year, yet Rs.10 shares were issued at a premium of Rs.40. The Commissioner (Appeals) deleted the addition and the Tribunal upheld the deletion. The matter was decided on 2019-01-17 by the High Court (High Court of Delhi at New Delhi; Sanjiv Khanna and Anup Jairam Bhambhani, JJ (judgment by Sanjiv Khanna, J)). On those facts the High Court held as follows. The Revenue's appeal under section 260A was allowed and the substantial question answered in its favour. The addition of Rs.1,51,50,000 under section 68 was restored. The Court held that the case fell in the category where the Assessing Officer had not kept quiet but had made enquiries and put specific queries to the assessee, and that the Tribunal had ignored the material before it - the common address of the five subscribers, the size of the investment, the search material on Tarun Goyal and the accommodation entry operation, the findings extracted in the assessment order, the assessee's own lack of business or expenditure, the unexplained premium of Rs.40 on a Rs.10 share, and the failure to produce directors who had already filed confirmations. On that factual position the Court held without hesitation that the transactions were sham and make-believe with excellent paper work to camouflage their bogus nature, that the Tribunal's order was superficial and perfunctory, and that its reasoning was contrary to human probabilities because no one invests such amounts without concern for return and safety.
The Court's method was to place the case within the classification made in CIT v Navodaya Castles Pvt Ltd. There are two sets of section 68 share capital cases, each turning on its own facts. In the first, the assessee produces documents establishing the shareholders' identity, the bank accounts and the banking channel, with affidavits or confirmations, and the officer then makes no further enquiry; the addition cannot stand, as Rakam Money Matters and Victor Electrodes show. In the second, there is evidence that the subscriber is a paper company with no source of income which has nevertheless made a substantial investment, and the officer has examined the bank statements, the financial position of the beneficiary and the surrounding circumstances. In that second class the three requirements - identification, creditworthiness and genuineness - 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 go to identification and have their limitation once there is material that the subscriber is a paper company, the Court applying Durga Prasad More for the proposition that the apparent need not be taken as real and that the taxing authorities are not required to put on blinkers. Through the extract from Nova Promoters the Court also rejected the Tribunal's premise that the officer had to prove that the money emanated from the assessee's own coffers: section 68 permits an addition where the explanation of the nature and source of the credit is absent or unsatisfactory, and places no duty on the officer to identify the source, as Govindarajulu Mudaliar had settled. Applying that framework, the Court found that the officer here had enquired and that the Tribunal had simply not engaged with what he found. In the words reproduced by the source cited on this page: "the transactions in question were clearly sham and make-believe with excellent paper work to camouflage their bogus nature"
It was decided by the High Court on 2019-01-17 and is reported as ITA 49/2018 (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 260A, 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 under section 260A was allowed and the substantial question answered in its favour. The addition of Rs.1,51,50,000 under section 68 was restored. The Court held that the case fell in the category where the Assessing Officer had not kept quiet but had made enquiries and put specific queries to the assessee, and that the Tribunal had ignored the material before it - the common address of the five subscribers, the size of the investment, the search material on Tarun Goyal and the accommodation entry operation, the findings extracted in the assessment order, the assessee's own lack of business or expenditure, the unexplained premium of Rs.40 on a Rs.10 share, and the failure to produce directors who had already filed confirmations. On that factual position the Court held without hesitation that the transactions were sham and make-believe with excellent paper work to camouflage their bogus nature, that the Tribunal's order was superficial and perfunctory, and that its reasoning was contrary to human probabilities because no one invests such amounts without concern for return and safety. It arises in Cash Credits & Unexplained Money and Evidence & Burden of Proof matters, on section 68, section 260A of the Income Tax Act 1961, and was decided by High Court of Delhi at New Delhi; Sanjiv Khanna and Anup Jairam Bhambhani, 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. Produce the directors of the subscriber companies when asked; where confirmations have come in, the Court will infer you are in touch with them and hold the failure against you. Ask the Assessing Officer to put the search material and any recorded statements to you and take the Rakam Money Matters point if he does not - the assessee must be confronted with the material relied on. Keep the two categories in mind when choosing your authorities: cases where the officer made no enquiry will not carry a case where he did. Where subscribers share an address with a known entry operator, expect the enquiry to move to creditworthiness and genuineness, and build evidence of the investor's own source of funds.
Validity check could not be completed. No later history was checked and it is not known whether this order was carried further. The judgment applies the same Court's earlier decisions in Navodaya Castles and Nova Promoters and the Supreme Court's decisions in Durga Prasad More and Govindarajulu Mudaliar, but nothing subsequent has been established from the material read. The source page records the judgment as cited in 55 later decisions, which is a fact about the page and not a check of how it has been treated. 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 batch line carried no reporter citations, so the appeal number from the judgment's first page is used. The judgment contains two internal slips: paragraph 1 says the appeal arises from a Tribunal order dated 3 March 2019, which is after the date of pronouncement, and paragraph 12(b) puts the total investment at Rs.1,51,00,000 against Rs.1,51,50,000 in the question framed and in the table. The dates in the judgment are otherwise consistent - reserved 31 October 2018, pronounced 17 January 2019, assessment order 30 December 2010. The judgment does not reproduce the Tribunal's order in full or state which of the two remaining subscriber companies' investments were accepted and why. It also does not say whether the assessee was in fact confronted with the search statements, although it notes that requirement in the extract from Rakam Money Matters, so the case is of limited use on that point. Section 68 as it applied to this assessment year did not carry the proviso on share capital inserted with effect from 1 April 2013, and the judgment says nothing about it. 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 under section 260A was allowed and the substantial question answered in its favour. The addition of Rs.1,51,50,000 under section 68 was restored. The Court held that the case fell in the category where the Assessing Officer had not kept quiet but had made enquiries and put specific queries to the assessee, and that the Tribunal had ignored the material before it - the common address of the five subscribers, the size of the investment, the search material on Tarun Goyal and the accommodation entry operation, the findings extracted in the assessment order, the assessee's own lack of business or expenditure, the unexplained premium of Rs.40 on a Rs.10 share, and the failure to produce directors who had already filed confirmations. On that factual position the Court held without hesitation that the transactions were sham and make-believe with excellent paper work to camouflage their bogus nature, that the Tribunal's order was superficial and perfunctory, and that its reasoning was contrary to human probabilities because no one invests such amounts without concern for return and safety.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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