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Section 68 in The Income- Tax Act, 1995
Section 68 in The Companies Act, 1956
The Income- Tax Act, 1995
Commissioner Of Income Tax vs Divine Leasing And Finance Ltd. ... on 16 November, 2006
Commissioner Of Income Tax vs Kundan Investment Ltd. on 20 March, 2003
Citedby 17 docs - [View All]
Vikrant Puri, New Delhi vs Department Of Income Tax on 30 March, 2016
Vikrant Puri, New Delhi vs Department Of Income Tax on 28 March, 2016
Ghisulal S Jain (Huf), Mumbai vs Assessee on 23 January, 2014
Francotyp Postalia India Pvt. ... vs Department Of Income Tax on 10 December, 2009
Jatinder Machanda, New Delhi vs Department Of Income Tax

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section 68
share application money
Delhi High Court
application money
Commissioner Of Income Tax-Iv vs M/S. Dwarkadhish Investment (P) ...
cash credit
on 2 August, 2010
undisclosed income
Author: Manmohan lovely exports
love
#12-13 additional evidence
$~ divine leasing and finance
* IN THE HIGH COURT OF DELHI AT NEW DELHI
lease finance
12.
+ ITA 911/2010 repudiation

COMMISSIONER OF
INCOME TAX-IV ..... Appellant
Through: Mr. N.P. Sahni, Senior Standing
Counsel
versus

M/S. DWARKADHISH
INVESTMENT (P) LTD. ..... Respondent
Through: None

AND

13.
+ ITA 913/2010

COMMISSIONER OF
INCOME TAX-IV ..... Appellant
Through: Mr. N.P. Sahni, Senior Standing
Counsel
versus

M/S. DWARKADHISH
CAPITAL (P) LTD. ..... Respondent
Through: None

Reserved on : 23rd July, 2010

% Date of Decision: 2nd August, 2010

CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE MANMOHAN

1. Whether the Reporters of local papers may be allowed to see the judgment? Yes
2. To be referred to the Reporter or not? Yes
 3. Whether the judgment should be reported in the Digest? Yes

ITA Nos. 911/2010 & 913/2010 Page 1 of 14

JUDGMENT

MANMOHAN, J CM 12293/2010 in ITA 911/2010 Allowed, subject to all just exceptions.

CM 12294/2010 in ITA 911/2010 & CM 12296/2010 in ITA 913/2010 For the reasons stated
in the applications, delay in re-filing the appeals is condoned.

Applications stand disposed of.

ITA 911/2010 & ITA 913/2010

1. The present appeals have been filed under Section 260A of Income Tax Act, 1961 (for
brevity "Act, 1961") challenging the common order dated 29th May, 2009 passed by the
Income Tax Appellate Tribunal (in short "ITAT") in ITA Nos. 4799/Del/04 and 4800/Del/04,
for the Assessment Year 2001-2002. Since similar issue is involved in both the appeals, we
are passing a common order. However, for the purpose of noting the facts, we are referring to
ITA No. 911/2010.

2. The relevant facts are that the respondent-assessee was incorporated on 23rd March, 1985.
It was engaged in the business of financing and trading of shares. On 22nd October, 2001,
assessee filed a return declaring NIL income. The return was initially processed under Section
143(1) of Act, 1961. However, subsequently on 21st October, 2002 the case was selected for
scrutiny and notice under Section 143(2) of Act, 1961 was issued to the respondent-assessee.
On scrutiny of accounts, the Assessing Officer (in short "AO") found an addition of Rs.
71,75,000/- in the share capital of the assessee. The AO sought an explanation of the assessee
about this addition in the share capital. The assessee vide letter dated 13th August, 2003
offered a detailed explanation.

3. However, according to the AO, the assessee failed to explain the addition of share
application money from five of its subscribers. Accordingly, AO made an addition of Rs.
35,50,000/- with the aid of Section 68 of Act, 1961 on account of unexplained cash credits
appearing in the books of the assessee. However, in appeal, the Commissioner of Income Tax
(Appeals) [in short "CIT(A)"] deleted the addition on the ground that the assessee had proved
the existence of the shareholders and the genuineness of the transaction. The relevant portion
of the order passed by the CIT(A) is reproduced hereinbelow :-

"2.12 The authorized representative of the applicant has stated that in the written
submission that following documents have been filed to prove the identity of share
applicants:

1. Copies of Certificate of incorporation in respect of the corporate applicants.

2. Copy of Memorandum and Articles of Association of the corporate applicants.

3. Copies of acknowledgement of returns filed/income tax orders in the case of the

applicants.

4. Sworn affidavits from the applicants regarding investment in the appellant

company.

5. Copy of Bank accounts of shareholders.

6. Copies of documents obtained from Registrar of Companies.

7. Copies of annual returns filed under the Companies Act.

 8. Other relevant documents, wherever available, evidencing the existence and
genuineness of the applicants.

xxxx xxxx xxxx xxxx 2.21 I have considered the submission made by the authorized
representative of the appellant and the facts stated in the assessment order. It is
observed that the addition made by the assessing officer on account of unexplained
share application money cannot be sustained for the following reasons:-

(i) The applicants concerned were identified.

(ii) The applicants confirmed the payment of money to the appellant for purchase
of shares.

(iii) The transactions in question were by cheques.

(iv) The affidavit of the subscribers were filed indicating their full address, details
of deposits made with the appellant and sources where from money was obtained
to make the deposits. Copies of bank accounts were furnished. These affidavits
were notarized. There was no ground for disbelieving the contents of the affidavits.

(v) Most of the subscribers were companies incorporated with the Registrar of
Companies. Proper inquiries would have revealed the true facts of the case. The
appellant cannot be faulted if there was no time to give them an opportunity to
rebut the Inspector‟s report made at the back of the appellant.

(vi) The deposits were not of an order that could not be believed.

(vii) The shares have been allotted to the shareholders and letter of allotment have
been submitted to the Registrar of Companies.

(viii) The existence of these companies (i.e. depositors of shares application

money) has also been verified from the website of Department of Companies
Affairs. The existence of the shareholders, therefore cannot be doubted.

2.22 In the interest of justice, I scrutinized all the available information and I am of
the view that in the facts and circumstances, this is not a fit case for not accepting
the genuineness of the deposits. The identity of the subscribers and the
genuineness of the transactions have been established....."

4. The ITAT confirmed the order of the CIT(A) as it was also of the opinion that the assessee
had been able to prove the identity of the share applicants and the share application money
had been received by way of account payee cheques. In reaching this conclusion, the ITAT had
relied upon a Division Bench judgment of this Court in Commissioner of Income Tax Vs.
Divine Leasing & Finance Ltd., (2008) 299 ITR 268 (Delhi).

5. Mr. N.P. Sahni, learned standing counsel for the Revenue submitted that the ITAT had
erred in law in deleting the addition made by the AO under Section 68 of Act, 1961 as the
assessee had failed to discharge the burden in respect of the identity of the share applicants,
genuineness of transaction and creditworthiness of share applicants. In support of his
submission, he relied upon following judgments :- A) CIT Vs. Rathi Finlease Ltd., 215 CTR
167 (M.P.) wherein it has been held as under :-

"17. ......S.68 of the Act enjoined the assessee to offer an explanation about the
nature and source of the sum found credited in his books and if the explanation
was not satisfactory, the amount can be credited and charged to income-tax as
income of the assessee. Since the assessee, though tried to explain the genuineness
of the credit on the basis of letters of confirmation, it could not be explained as to
how the transaction was materialized when the companies were not in existence
and the amount was paid by cheque only on the date on which the amount was
 credited to the account of the company. It was for the assessee to discharge this
burden............"

B) CIT vs. Kundan Investment Ltd., 263 ITR 626 (Cal.) wherein it has been held as under :-

"..........Under Section 68, the Income-tax Officer is empowered to lift the veil of
corporate identity and find out as to whether the apparent is real. It is the assessee
on whom the onus lies. Unless sufficient materials are produced, the onus does not
shift on the Revenue. But once the materials are scrutinized and the result of the
scrutiny is communicated to the assessee, the onus shifts from the Revenue to the
assessee. Then the assessee has to take appropriate steps for proving its case.
Unless there are sufficient materials after such communication, produced by the
assessee, the Income-tax Officer can do no further."

C) Commissioner of Income Tax vs. Sophia Finance Limited, 205 ITR 98 (Del) wherein it has
been held as under :-

"...........As we read Section 68 it appears that whenever a sum is found credited in

the books of account of the assessee then, irrespective of the colour or the nature of
the sum received which is sought to be given by the assessee, the Income tax
Officer has the jurisdiction to enquire from the assessee the nature and source of
the said amount. When an explanation in regard thereto is given by the assessee,
then it is for the Income tax Officer to be satisfied whether the said explanation is
correct or not. It is in this regard that enquiries are usually made in order to find
out as to whether, firstly, the persons from whom money is alleged to have been
received actually existed or not. Secondly, depending upon the facts of each case,
the Income tax Officer may even be justified in trying to ascertain the source of the
depositor, assuming he is identified, in order to determine whether that depositor
is a mere name lender or not. Be that as it may, it is clear that the Income tax
Officer has jurisdiction to make enquiries with regard to the nature and source of a
sum credited in the books of account of an assessee and it would be immaterial as
to whether the amount so credited is given the colour of a loan or a sum
representing the sale proceeds or even receipt of share application money. The use
of the words "any sum found credited in the books" in section 68 indicates that the
said section is very widely worded and an Income tax officer is not precluded from
making an enquiry as to the true nature and source thereof even if the same is
credited as receipt of share application money.

xxxx xxxx xxxx xxxx ..............On the basis of the language used under Section 68
and the various decisions of different High Courts and the Apex Court, the only
conclusion which could be arrived at is: (i)that there is no distinction between the
cash credit entry existing in the books of the firm whether it is of a partner or of a
third party,

(ii) that the burden to prove the identity, capacity and genuineness has to be on the
assessee, (iii) if the cash credit is not satisfactorily explained the Income Tax
Officer is justified to treat it as Income from "undisclosed sources", (iv) the firm
has to establish that the amount was actually given by the lender, (v) the
genuineness and regularity in the maintenance of the account has to be taken into
consideration by the taxing authorities, (vi) if the explanation is not supported by
any documentary or other evidence, then the deeming fiction credited by Section
68 can be invoked. In these circumstances, we are of the view that simply because
the amount is credited in the books of the firm in the partner‟s capital account it
cannot be said that it is not the undisclosed income of the firm and in all cases it
has to be assessed as an undisclosed income of the partner alone. In these
circumstances, we are of the view that the Tribunal was not justified in holding that
the cash credits of Rs.11,502 in the account of Shri Kishorilal, one of the partners,
 could not be assessed in the hands of the firm and in deleting the same. Since the
matter was not considered by the Tribunal on the merits, the Tribunal would be
free to hear the arguments of both the parties and decide afresh in view of the
observations made above. Accordingly, the reference is answered in favour of the
Revenue and against the assessee.

D) CIT vs. Korlay Trading Co. Ltd., 232 ITR 820 (Cal) wherein it has been held as under :-

"..........There should be a genuine transaction. The income tax file number has
been given but that is not enough to prove the genuineness of the cash credit.
Admittedly, there is no affidavit to this effect, by the creditor, on record.
Considering these facts, we find that the finding of the Tribunal in this regard is
perverse. The assessee has failed to prove the genuineness of the cash credit......

E) CIT vs. Shiv Shakti Timber, 229 ITR 505 (MP) wherein it has been held as under :-

"......Therefore, from the series of decisions of various High Courts, it is well

established that in such a situation where there is a credit entry in the books of
account of the assessee and there is no satisfactory explanation, then it will be
deemed to be the income of the firm and will be added to the income of the firm
and can be accordingly taxed. The view taken by the Tribunal appears to be
erroneous of the face of it."

F) Sumati Dayal vs. CIT, 214 ITR 801 (SC) wherein the Apex Court has held as under :-

"It is no doubt true that in all cases in which a receipt is sought to be taxed as
Income, the burden lies upon the Department to prove that it is within the taxing
provision and if a receipt is in the nature of income, the burden of provind that it is
not taxable because it falls within the exemption provided by the Act lies upon the
assessee. (See Parimisetti Seetharamamma [1965] 57 ITR 532 at page 536). But, in
view of Section 68 of the Act, where any sum is found credited in the books of the
assessee for any previous year, the same may be charged to income tax as the
income of the assessee of that previous year if the explanation offered by the
assessee about the nature and source thereof is, in the opinion of the Assessing
Officer, not satisfactory. In such a case there is, prima facie, evidence against the
assessee, viz. the receipt of money, and if he fails to rebut it the said evidence being
unrebutted, can be used against him by holding that it was a receipt of an income
nature. While considering the explanation of the assessee the Department cannot,
however, act unreasonably.

xxxx xxxx xxxx xxxx ..............This raises the question whether the apparent can be
considered as the real. As laid down by this Court the apparent must be considered
the real until it is shown that there are reasons to believe that the apparent is not
the real and that the taxing authorities are entitled to look into the surrounding
circumstances to find out the reality and the matter has to be considered by
applying the test of human probabilities.......

xxxx xxxx xxxx xxxx This, in our opinion, is a superficial approach to the problem.
The matter has to be considered in the light of human probabilities..............

G) CIT Vs. Divine Leasing and Finance Ltd. (supra) wherein it has been ruled thus :-

"There cannot be two opinions on the aspect that the pernicious practice of
conversion of unaccounted money through the masquerade or channel of
investment in the share capital of a company must be firmly excoriated by the
Revenue. Equally, where the preponderance of evidence indicates absence of
culpability and complexity of the assessee it should not be harassed by the
Revenue‟s insistence that it should prove the negative. In the case of a public issue,
the company concerned cannot be expected to know every detail pertaining to the
 identity as well as financial worth of each of its subscribers. The company must,
however, maintain and make available to the Assessing Officer for his perusal, all
the information contained in the statutory share application documents. In the
case of private placement the legal regime would not be the same. A delicate
balance must be maintained while walking the tightrope of Sections 68 and 69 of
the Income Tax Act. The burden of proof can seldom be discharged to the hilt by
the assessee; if the Assessing Officer harbours doubts of the legitimacy of any
subscription he is empowered, nay duty bound, to carry out thorough
investigations. But if the Assessing Officer fails to unearth any wrong or illegal
dealings, he cannot obdurately adhere to his suspicions and treat the subscribed
capital as the undisclosed income of the company."

6. In our opinion, as Section 68 of Act, 1961 has been interpreted as recently as 2008 by a
Division Bench of this Court in Divine Leasing & Finance Ltd. (supra) after considering all the
relevant judgments, we do not have to reconsider all the judgments referred to by Mr. Sahni
which are prior in date and time to the aforesaid judgment. In fact, a Special Leave Petition
filed against the said Division Bench judgment was dismissed by the Supreme Court by way of
a speaking order in Commissioner of Income Tax Vs. Lovely Exports (P) Ltd., 216 CTR 195
(SC). The Supreme Court in Lovely Exports (P) Ltd. (supra), has held as under:-

"2. Can the amount of share money be regarded as undisclosed income under s. 68
of IT Act, 1961? We find no merit in this Special Leave Petition for the simple
reason that if the share application money is received by the assessee company
from alleged bogus shareholders, whose names are given to the AO, then the
Department is free to proceed to reopen their individual assessments in
accordance with law. Hence, we find no infirmity with the impugned judgment......"

7. Consequently, the doctrine of merger would apply and the judgment of the Supreme Court
in Lovely Exports (P) Ltd. (supra) would cover the field with regard to interpretation of
Section 68 of Act, 1961.

8. In any matter, the onus of proof is not a static one. Though in Section 68 proceedings, the
initial burden of proof lies on the assessee yet once he proves the identity of the
creditors/share applicants by either furnishing their PAN number or income tax assessment
number and shows the genuineness of transaction by showing money in his books either by
account payee cheque or by draft or by any other mode, then the onus of proof would shift to
the Revenue. Just because the creditors/share applicants could not be found at the address
given, it would not give the Revenue the right to invoke Section 68. One must not lose sight of
the fact that it is the Revenue which has all the power and wherewithal to trace any person.
Moreover, it is settled law that the assessee need not to prove the „source of source‟.

9. We also find that in the case of the respondent-assessee itself, a Division Bench of this
Court in Commissioner of Income-tax v. Dwarikadhish investment (P.) Ltd. (2008) 167
Taxman 321 (Delhi) had dealt with a similar issue with regard to the Assessment year 1997-

98. The relevant portion of the order passed by the Division Bench in the said judgment is
reproduced hereinbelow:-

"3. The Assessing Officer required the assessees to furnish details and documents.
The assessees produced copies of sale and purchase bills of the share brokers
through whom the transactions took place and photocopies of confirmations of
persons who had contributed the fresh share application money. The assessees
furnished the PAN (GIR) numbers of the applicants, the details of the cheque
numbers and dates. The assessees contended that letters sent to the shareholders
had not been responded to.

4. The Assessing Officer required the Assessee to furnish bank statement to

substantiate the money availability with the Assessee and also to prove the
 genuineness of the transactions. This not having been done, the Assessing Officer
got enquiries made through an Income Tax Inspector who found that none of the
applicants were found to exist at the address given in the confirmations. However,
the report of the Income Tax Inspector was furnished to the assessees on 22nd
February 2000 and the Assessment order was passed on the very next day, that is,
23rd February 2000 giving the assessees no time to respond.

5. Before the CIT (A) the assessees furnished additional evidence, copies of which
were sent by the CIT (A) to the Assessing Officer for comments. Despite reminders,
no response was received from the Assessing Officer by the CIT(A) on the
additional evidence. The CIT(A) then admitted the additional evidence. After
examining the entire record, the CIT(A) deleted the addition on account of the
unexplained share application money for..........

6. In the appeal by the Revenue, the Tribunal found that the facts of the case were
no different from those in the case of the group company of the present Assessee
namely M/s. Dwarikadhish Financial Services. In the said case the Tribunal had
deleted the addition made by the Assessing Officer on account of unexplained
share application money. The said decision was upheld by this Court in its order in
CIT v. Dwarkadhish Financial Services [2005] 148 Taxman 54.

7. That apart, the Tribunal again examined the documents giving the details of
each of the applicants. It noted that ?the above documents were available on the
file of the AO.? Accordingly it dismissed the Revenue's appeals. Learned counsel
for the Revenue sought to distinguish this Court's decision in the case of the group
company of the assessees, on the ground that the facts there were different.
However, we find that the findings of the CIT(A) as extracted hereinabove are
sufficient to show that the additions made by the Assessing Officer were not
justified. The reasoning and conclusions arrived at concurrently by the CIT(A) and
the Tribunal suffer from no perversity and are consistent with the law as explained
by this Court in Commissioner of Income Tax v. Divine Leasing and Finance
Limited (ITA No. 53/2005 decided on 16th November, 2006) reported in (2007)
207 CTR (Del) 38 and in particular para 16 which reads thus:

"In this analysis, a distillation of the precedents yields the following propositions of
law in the context of Section 68 of the IT Act. The Assessee has to prima facie prove
(1) the identity of the creditor/subscriber; (2) the genuineness of the transaction,
namely, whether it has been transmitted through banking or other indisputable
channels; (3) the credit worthiness or financial strength of the creditor/subscriber;
(4) if relevant details of the address or PAN identity of the creditor/subscriber are
furnished to the Department along with copies of the Shareholders Register,
Shared Application Forms, Share Transfer Register etc., it would constitute
acceptable proof or acceptable explanation by the Assessee; (5) The Department
would not be justified in drawing an adverse inference only because the
creditor/subscriber fails or neglects to respond to its notices; (6) the onus would
not stand discharged if the creditor/subscriber denies or repudiates the transaction
set up by the Assessee nor should the AO take such repudiation at face value and
construe it, without more, against the Assessee. (7) The Assessing Officer is duty-
bound to investigate the credit worthiness of the creditor/subscriber the
genuineness of the transaction and the veracity of the repudiation." (p. 453)

9. We are of the view that no substantial question of law arises in these appeals.
Accordingly, these appeals are dismissed."

10. We are also informed that a Special Leave Petition against the aforesaid Division Bench
judgment in the case of the respondent- assessee has been dismissed by the Supreme Court.
Accordingly, we are of the opinion that no question of law arises in the present cases as the
matter is fully covered by the judgment of the Supreme Court in Lovely Exports (P) Ltd.
(supra) as well as the Division Bench judgment of this Court in the case of the respondent-
assessee itself.

11. Consequently, we are of the view that the present appeals amount to relitigation. The
Supreme Court in K.K. Modi Vs. K.N. Modi and Ors., (1998) 3 SCC 573 has held, "It is an
abuse of the process of the court and contrary to justice and public policy for a party to
relitigate the same issue which has already been tried and decided earlier against him. The
reagitation may or may not be barred as res judicata. But if the same issue is sought to be
reagitated, it also amounts to an abuse of the process of the court.....".

12. Though we were initially inclined to impose costs yet we are of the opinion that ends of
justice would be met by giving a direction to the Revenue to be more careful before filing
appeals in a routine manner. In our view, appeal should not be filed in matters where either
no question of law arises or the issue of law is a settled one. We give this direction because the
„judicial capital‟ in terms of manpower and resources is extremely limited.

13. Registry is directed to communicate copies of this order to all the Chief Commissioners of
Income Tax in Delhi for necessary action. With the aforesaid direction, the present appeals
are dismissed in limine but without any order as to costs.

MANMOHAN, J.

CHIEF JUSTICE August 02, 2010 rn/ng