Can the officer look past my subscriber at where the subscriber's own subscribers got their money?
It depends on what the file shows. This is the decision the department relies on for going up the chain. Upholding a revision under s.263, the Calcutta High Court quoted the Special Bench in Sophia Finance for the width of the words 'any sum found credited in the books' and held that the officer is not precluded from enquiring into the true nature and source of a credit even where it is entered as share application money; it recorded that the submission that the source of the source is irrelevant did not appear to be correct. What it decides is that the enquiry could be directed on this file, not that the credits were bogus.
Decided by the High Court (Calcutta High Court — Girish Chandra Gupta J and Asha Arora J) on 2016-05-13, reported as [2016] 70 taxmann.com 124 / 240 Taxman 306 / 386 ITR 162 / 287 CTR 512 (Cal); G.A. No. 509 of 2016 with ITAT No. 113 of 2016; special leave petitions dismissed without reasons, Rajmandir Estates (P.) Ltd. v. Pr. CIT [2017] 77 taxmann.com 285 / 245 Taxman 127 (SC), 9 January 2017 — the Supreme Court's own order numbers them CC Nos. 22566-22567 of 2016, the reporters citing them as SLP (C) Nos. 22566 and 22567 of 2016.. It bears on section 68, section 263 of the Income Tax Act 1961, in Cash Credits & Unexplained Money, Evidence & Burden of Proof and Revision & Rectification matters.
Practitioners quote Nemi Chand Kothari and Ami Industries for the proposition that the enquiry stops at the immediate creditor. This is the authority on the other side, and it was a revision case, so it also decides that an officer who does not make that enquiry when the file provokes it leaves an order open to s.263. The pattern that provoked it — matching credits into subscriber accounts just before the cheques, blanks in the application forms, subscribers held by promoters and relatives — is the pattern the department looks for.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2009-10 the assessee company's share capital rose from Rs 55.15 lakh to Rs 1.34 crore and its reserves from Rs 77,398 to Rs 39.92 crore, on an issue of 7,92,737 shares of Rs 10 each at a premium of Rs 390 to 39 corporate subscribers. Its authorised share capital for the year was Rs 1.36 crore, so that a premium of nearly Rs 32 crore was raised without any increase in authorised capital and without the statutory fee that would have entailed. The original return showed gross total income of Rs 24,658; the assessee then wrote to the Assessing Officer that it had inadvertently omitted a receipt of Rs 61,000 of consultancy fees, a notice under s.148 followed on 15 February 2011, and the assessment under s.143(3) read with s.147 was completed on 30 March 2011 with an addition of Rs 1,21,000. Notices under s.133(6) had gone to 15 of the 39 subscribers. Nineteen of the 39 had themselves raised the money as share application money in their own companies and 15 had raised it by selling shares; matching amounts were credited to subscribers' accounts shortly before the cheques issued to the assessee were presented; the share application forms left the date of allotment, the number of shares allotted, the share ledger folio, the allotment register folio and the application number blank; and the assessee admitted that the shares were offered to and subscribed by closely held companies owned by the promoters and directors or their close relatives and friends. By order of 22 March 2013 the Commissioner revised the assessment under s.263, holding it made without application of mind or requisite enquiry and directing a thorough enquiry into the layers through which the capital had been rotated and the examination of past and present directors of the assessee and of the subscriber companies. The Tribunal upheld that order and the assessee appealed.
The assessee's appeal was dismissed and the revision under s.263 upheld. The Court framed four questions at para 21 and answered them at para 30: the order under s.263 directing further investigation was legal, and the assessment made under s.143(3) read with s.147 was erroneous and prejudicial to the interest of the revenue; the Commissioner's finding that unaccounted money was or could have been laundered as clean share capital was not perverse, and neither was the Tribunal's order. Money received on account of share application can be brought within s.68 if the source of the receipt is not satisfactorily established, and the submission that the source of the source is not a relevant enquiry was held not to appear to be correct (para 29). Two limits sit in the judgment itself. Whether the proviso to s.68 is retrospective was expressly left undecided and kept open (para 29). And the Court closed by clarifying that the views expressed were for the purpose of disposing of the appeal and would not preclude the statutory authority from arriving at its own conclusion in accordance with law (para 30), so the prima facie inferences at paras 23 and 24 — that the transactions were nominal rather than real and the subscribers mere name lenders — decide nothing at the fresh enquiry the Commissioner directed.
The Court took the money-laundering question first. It set out the three steps of placement, layering and integration from a published commentary on the Prevention of Money-Laundering Act 2002 (para 22), then tabulated seven pieces of evidence on the file and drew prima facie inferences from them (paras 23 and 24): about twenty companies apparently large in capital but, on the material, paper in substance; blank share application forms showing that the application and allotment were not in the usual course of business; matching credits into subscribers' accounts shortly before the cheques to the assessee were presented; and the assessee's own admission that the subscribers were closely held companies of the promoters, directors and their relatives and friends. On that footing the Commissioner's belief was held not to be perverse. Steller Investment was distinguished because no question of a device for money laundering arose there and the Prevention of Money-Laundering Act 2002 was not then on the statute book; Lovely Exports was held to give the assessee no assistance because that Division Bench had itself said that an omission to enquire, where the exercise is provoked, makes the order erroneous and prejudicial to the revenue (para 25). On adequacy of enquiry the Court applied its own earlier decision in Maithan International, that an assessing officer who is both investigator and adjudicator cannot discharge his function by perfunctory or inadequate investigation, and the Delhi view in N.R. Portfolio that companies are dependent on the individuals behind them; the persons behind the assessee and behind the subscribing companies had not been interrogated, which was essential to unearth the truth (para 28). On the source-of-source point the Court relied on the passage in Sophia Finance — a decision of the Delhi High Court which this Court describes as a special bench — that the officer may even be justified in trying to ascertain the source of the depositor, and concluded in terms that the submission that the source of source is not a relevant enquiry does not appear to be correct (para 29). The arguments that receipt of share capital was not a taxable event before s.56(2)(viib) and that arm's length pricing in domestic transactions did not exist before ss.92A and 92BA were held not to be questions arising for determination (para 29). The reliance on Tara Devi Aggarwal was that an assessment can be erroneous and prejudicial where the assessee's object is to assist someone else, and who that person is here could only be answered after the enquiry the Commissioner directed (para 27).
We may however point out that the Special Bench of Delhi High Court in the case of Sophia Finance Ltd. (supra) held that "the ITO may even be justified in trying to ascertain the source of depositor". Therefore, the submission that the source of source is not a relevant enquiry does not appear to be correct.
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Handle my notice → Ask a CA on WhatsAppIt depends on what the file shows. This is the decision the department relies on for going up the chain. Upholding a revision under s.263, the Calcutta High Court quoted the Special Bench in Sophia Finance for the width of the words 'any sum found credited in the books' and held that the officer is not precluded from enquiring into the true nature and source of a credit even where it is entered as share application money; it recorded that the submission that the source of the source is irrelevant did not appear to be correct. What it decides is that the enquiry could be directed on this file, not that the credits were bogus. This was decided by the High Court (Calcutta High Court — Girish Chandra Gupta J and Asha Arora J) and bears on section 68, section 263 of the Income Tax Act 1961. It is reported as [2016] 70 taxmann.com 124 / 240 Taxman 306 / 386 ITR 162 / 287 CTR 512 (Cal); G.A. No. 509 of 2016 with ITAT No. 113 of 2016; special leave petitions dismissed without reasons, Rajmandir Estates (P.) Ltd. v. Pr. CIT [2017] 77 taxmann.com 285 / 245 Taxman 127 (SC), 9 January 2017 — the Supreme Court's own order numbers them CC Nos. 22566-22567 of 2016, the reporters citing them as SLP (C) Nos. 22566 and 22567 of 2016.. Practitioners quote Nemi Chand Kothari and Ami Industries for the proposition that the enquiry stops at the immediate creditor. This is the authority on the other side, and it was a revision case, so it also decides that an officer who does not make that enquiry when the file provokes it leaves an order open to s.263. The pattern that provoked it — matching credits into subscriber accounts just before the cheques, blanks in the application forms, subscribers held by promoters and relatives — is the pattern the department looks for. If it applies to you, the first step is this: Read the assessment file for the pattern this case turns on: matching credits into the subscriber's account shortly before the payment to you, and incomplete share application forms.
For assessment year 2009-10 the assessee company's share capital rose from Rs 55.15 lakh to Rs 1.34 crore and its reserves from Rs 77,398 to Rs 39.92 crore, on an issue of 7,92,737 shares of Rs 10 each at a premium of Rs 390 to 39 corporate subscribers. Its authorised share capital for the year was Rs 1.36 crore, so that a premium of nearly Rs 32 crore was raised without any increase in authorised capital and without the statutory fee that would have entailed. The original return showed gross total income of Rs 24,658; the assessee then wrote to the Assessing Officer that it had inadvertently omitted a receipt of Rs 61,000 of consultancy fees, a notice under s.148 followed on 15 February 2011, and the assessment under s.143(3) read with s.147 was completed on 30 March 2011 with an addition of Rs 1,21,000. Notices under s.133(6) had gone to 15 of the 39 subscribers. Nineteen of the 39 had themselves raised the money as share application money in their own companies and 15 had raised it by selling shares; matching amounts were credited to subscribers' accounts shortly before the cheques issued to the assessee were presented; the share application forms left the date of allotment, the number of shares allotted, the share ledger folio, the allotment register folio and the application number blank; and the assessee admitted that the shares were offered to and subscribed by closely held companies owned by the promoters and directors or their close relatives and friends. By order of 22 March 2013 the Commissioner revised the assessment under s.263, holding it made without application of mind or requisite enquiry and directing a thorough enquiry into the layers through which the capital had been rotated and the examination of past and present directors of the assessee and of the subscriber companies. The Tribunal upheld that order and the assessee appealed. The matter was decided on 2016-05-13 by the High Court (Calcutta High Court — Girish Chandra Gupta J and Asha Arora J). On those facts the High Court held as follows. The assessee's appeal was dismissed and the revision under s.263 upheld. The Court framed four questions at para 21 and answered them at para 30: the order under s.263 directing further investigation was legal, and the assessment made under s.143(3) read with s.147 was erroneous and prejudicial to the interest of the revenue; the Commissioner's finding that unaccounted money was or could have been laundered as clean share capital was not perverse, and neither was the Tribunal's order. Money received on account of share application can be brought within s.68 if the source of the receipt is not satisfactorily established, and the submission that the source of the source is not a relevant enquiry was held not to appear to be correct (para 29). Two limits sit in the judgment itself. Whether the proviso to s.68 is retrospective was expressly left undecided and kept open (para 29). And the Court closed by clarifying that the views expressed were for the purpose of disposing of the appeal and would not preclude the statutory authority from arriving at its own conclusion in accordance with law (para 30), so the prima facie inferences at paras 23 and 24 — that the transactions were nominal rather than real and the subscribers mere name lenders — decide nothing at the fresh enquiry the Commissioner directed.
The Court took the money-laundering question first. It set out the three steps of placement, layering and integration from a published commentary on the Prevention of Money-Laundering Act 2002 (para 22), then tabulated seven pieces of evidence on the file and drew prima facie inferences from them (paras 23 and 24): about twenty companies apparently large in capital but, on the material, paper in substance; blank share application forms showing that the application and allotment were not in the usual course of business; matching credits into subscribers' accounts shortly before the cheques to the assessee were presented; and the assessee's own admission that the subscribers were closely held companies of the promoters, directors and their relatives and friends. On that footing the Commissioner's belief was held not to be perverse. Steller Investment was distinguished because no question of a device for money laundering arose there and the Prevention of Money-Laundering Act 2002 was not then on the statute book; Lovely Exports was held to give the assessee no assistance because that Division Bench had itself said that an omission to enquire, where the exercise is provoked, makes the order erroneous and prejudicial to the revenue (para 25). On adequacy of enquiry the Court applied its own earlier decision in Maithan International, that an assessing officer who is both investigator and adjudicator cannot discharge his function by perfunctory or inadequate investigation, and the Delhi view in N.R. Portfolio that companies are dependent on the individuals behind them; the persons behind the assessee and behind the subscribing companies had not been interrogated, which was essential to unearth the truth (para 28). On the source-of-source point the Court relied on the passage in Sophia Finance — a decision of the Delhi High Court which this Court describes as a special bench — that the officer may even be justified in trying to ascertain the source of the depositor, and concluded in terms that the submission that the source of source is not a relevant enquiry does not appear to be correct (para 29). The arguments that receipt of share capital was not a taxable event before s.56(2)(viib) and that arm's length pricing in domestic transactions did not exist before ss.92A and 92BA were held not to be questions arising for determination (para 29). The reliance on Tara Devi Aggarwal was that an assessment can be erroneous and prejudicial where the assessee's object is to assist someone else, and who that person is here could only be answered after the enquiry the Commissioner directed (para 27). In the words reproduced by the source cited on this page: "We may however point out that the Special Bench of Delhi High Court in the case of Sophia Finance Ltd. (supra) held that "the ITO may even be justified in trying to ascertain the source of depositor". Therefore, the submission that the source of source is not a relevant enquiry does not appear to be correct."
It was decided by the High Court on 2016-05-13 and is reported as [2016] 70 taxmann.com 124 / 240 Taxman 306 / 386 ITR 162 / 287 CTR 512 (Cal); G.A. No. 509 of 2016 with ITAT No. 113 of 2016; special leave petitions dismissed without reasons, Rajmandir Estates (P.) Ltd. v. Pr. CIT [2017] 77 taxmann.com 285 / 245 Taxman 127 (SC), 9 January 2017 — the Supreme Court's own order numbers them CC Nos. 22566-22567 of 2016, the reporters citing them as SLP (C) Nos. 22566 and 22567 of 2016.. 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 263, 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 assessee's appeal was dismissed and the revision under s.263 upheld. The Court framed four questions at para 21 and answered them at para 30: the order under s.263 directing further investigation was legal, and the assessment made under s.143(3) read with s.147 was erroneous and prejudicial to the interest of the revenue; the Commissioner's finding that unaccounted money was or could have been laundered as clean share capital was not perverse, and neither was the Tribunal's order. Money received on account of share application can be brought within s.68 if the source of the receipt is not satisfactorily established, and the submission that the source of the source is not a relevant enquiry was held not to appear to be correct (para 29). Two limits sit in the judgment itself. Whether the proviso to s.68 is retrospective was expressly left undecided and kept open (para 29). And the Court closed by clarifying that the views expressed were for the purpose of disposing of the appeal and would not preclude the statutory authority from arriving at its own conclusion in accordance with law (para 30), so the prima facie inferences at paras 23 and 24 — that the transactions were nominal rather than real and the subscribers mere name lenders — decide nothing at the fresh enquiry the Commissioner directed. It arises in Cash Credits & Unexplained Money, Evidence & Burden of Proof and Revision & Rectification matters, on section 68, section 263 of the Income Tax Act 1961, and was decided by Calcutta High Court — Girish Chandra Gupta J and Asha Arora 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. Where that pattern is absent, distinguish the case on facts rather than arguing that source of source can never be enquired into. Do not treat a completed assessment as protection — the enquiry the officer failed to make is itself the ground for revision under s.263. Where the subscribers are companies held by promoters or relatives, expect the enquiry to travel further and prepare the intermediate entities' accounts in advance.
Searched for later treatment; none was found. That is not the same as a source affirming it. The special leave petitions against this judgment were dismissed by the Supreme Court (Kurian Joseph and A.M. Khanwilkar, JJ.) on 9 January 2017 in SLP (C) Nos. 22566 and 22567 of 2016, reported at [2017] 77 taxmann.com 285 / 245 Taxman 127 (SC). The order is not a reasoned one: delay was condoned and the Court said it found no reason to entertain the petitions. A dismissal in that form leaves the judgment standing but is not an affirmance of its reasoning, and it cannot by itself make the decision good law. A full-text search of a subscription case-law database turned up later Calcutta High Court decisions on share capital and premium under s.68 — Pr. CIT v. BST Infratech Ltd. [2024] 161 taxmann.com 668 (Cal) and Balgopal Merchants (P.) Ltd. v. Pr. CIT [2024] 162 taxmann.com 465 / 468 ITR 136 (Cal) — but neither lists this judgment among the cases referred to, so no decision applying, following or affirming it has been established. The status stays unverified for that reason and not because anything doubting it was found. Read the decision against the Bombay and Delhi line limiting the enquiry to the immediate creditor; the tension is unresolved. 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.
This was decided under s.263 on the adequacy of the officer's enquiry, not as a direct appeal against an addition, so what it settles is that the enquiry may be made — not that a chain of layers must always be explained, and not that any addition was justified. The Court said so itself: para 30 clarifies that its views are for the purpose of disposing of the appeal and do not preclude the statutory authority from reaching its own conclusion, and the findings at paras 23 and 24 on identity, genuineness, creditworthiness and name lending are expressly prima facie. The year is a pre-proviso one (assessment year 2009-10), and the Court declined to decide whether the proviso to s.68 is retrospective, keeping the question open. Sophia Finance, on which the source-of-source conclusion rests, is a Delhi High Court decision; this Court refers to it as a special bench, and it should not be read as a Tribunal Special Bench. Read the decision with the limiting line: Nemi Chand Kothari, Kinetic Capital Finance, MOD Creations and KRBL Infrastructure. The judgment has now been read in full. What it does not answer remains: how far up the chain of subscribers the enquiry may go, and what material would have been enough to answer it. The Court expressly kept open whether the proviso to s.68 is retrospective. No later decision applying or following the judgment has been traced, and the dismissal of the special leave petitions was without reasons, so the reasoning has not been tested above. 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 assessee's appeal was dismissed and the revision under s.263 upheld. The Court framed four questions at para 21 and answered them at para 30: the order under s.263 directing further investigation was legal, and the assessment made under s.143(3) read with s.147 was erroneous and prejudicial to the interest of the revenue; the Commissioner's finding that unaccounted money was or could have been laundered as clean share capital was not perverse, and neither was the Tribunal's order. Money received on account of share application can be brought within s.68 if the source of the receipt is not satisfactorily established, and the submission that the source of the source is not a relevant enquiry was held not to appear to be correct (para 29). Two limits sit in the judgment itself. Whether the proviso to s.68 is retrospective was expressly left undecided and kept open (para 29). And the Court closed by clarifying that the views expressed were for the purpose of disposing of the appeal and would not preclude the statutory authority from arriving at its own conclusion in accordance with law (para 30), so the prima facie inferences at paras 23 and 24 — that the transactions were nominal rather than real and the subscribers mere name lenders — decide nothing at the fresh enquiry the Commissioner directed.
TaxSphere, “Rajmandir Estates P Ltd v PCIT”, https://taxnotice.vittsphere.com/caselaw/case/rajmandir-estates-v-pcit-source-of-source-enquiry/ (validity last checked 2026-08-20)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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