CIT vs. Oasis Hospitalities Pvt Ltd (Delhi High Court)

S. 68 ‘Cash Credits’ Principles of Law laid down

In a batch of cases, the Court had to consider whether the addition made by the AO u/s 68 on account of unexplained share application money was justified. After a comprehensive review of all the important cases on s. 68, the following principles were laid down:

(i) S. 68 provides that if the assessee is not able to give satisfactory explanation as to the “nature and source” of a sum found credited in his books, the sum may be treated as the “undisclosed income” of the assessee. The initial burden is on the assessee to explain the “nature and source” of the credit and to do so, the assessee is required to prove (a) Identity of the shareholder; (b) Genuineness of transaction; and (c) credit worthiness of shareholders;

(a) The identity of the shareholder can be proved by either (if individual) producing him before the AO or by way of documents, registered address, PAN etc;

(b) The genuineness of the transaction can be shown from the fact that the money has been received from the shareholder. If the money is received by cheque and is transmitted through banking or other indisputable channels, the genuineness of transaction would be proved. Other documents showing the genuineness of transaction could be the copies of the shareholders register, share application forms, share transfer register, etc;

(c) The creditworthiness or financial strength of the creditor/subscriber can be proved by producing the bank statement of the creditors/subscribers showing that it had sufficient balance in its accounts to enable it to subscribe to the share capital. Once these documents are produced, the assessee would have satisfactorily discharge the onus cast upon him. The AO can discredit the documents produced by the assessee with cogent reasons and materials but not on the realm of suspicion;

(ii) If the assessee has produced documents like PAN Card, bank account details or details from the bankers the onus shifts upon the AO and it is for him to reach the shareholders and the AO cannot burden the assessee merely on the ground that summons issued to the investors were returned back with the endorsement “not traceable”;

(iii) The initial burden on an assessee which is a pvt ltd company is somewhat heavy because the shareholders are family friends/close acquaintances etc and the assessee cannot feign ignorance about the status of these parties;

(v) There is an additional burden on the Department to show that even if share applicants did not have the means to make investment, the investment made by them actually emanated from the coffers of the assessee so as to enable it to be treated as the undisclosed income of the assessee. In the absence of such finding, addition cannot be made u/s 68 in the hands the assessee.

(vi) The Department is free to reopen the individual assessment in case of alleged bogus shareholders in accordance with law and, thus, not remedy-less.