Bogus Capital Infusion: Delhi High Court Rules in Favour of the Income-tax Department
In a significant order pronounced on 9 February 2019, Justice Sanjeev Khanna of the Delhi High Court ruled against the assessee who was found to have infused capital through what seemed like bogus entries into his account. Interestingly, the commissioner of income-tax (appeals) and the income-tax appellate tribunal had rejected the assessing officer’s (AO) contention about bogus entries. The AO had added the amount of bogus capital infusion into the income.
The judgement would deal a powerful blow to the practice of shell companies providing and getting accommodation or bogus entries.
The case is as follows. NDR Promoters Pvt Ltd had raised Rs1.68 crore from a bunch of companies (see table below). Of this, for the amounts totalling Rs1.51 crore, the assessing officer as per his order of 30 December 2010, added Rs1.51 crore to the income of NDR promoters. His logic was that these companies were created by and de facto operated by Tarun Goyal, chartered accountant (CA), who had set up about 90 companies or firms including these five companies for providing 'accommodation entries'. 
The paperwork was perfect but there were chinks which had revealed that the true nature of the transactions was to convert illegitimate money by providing bogus or accommodation entries. A search under Section 132 of the Income-tax (I-T) Act conducted by the investigation wing of the I-T department on Mr Goyal unearthed that the registered offices of all these 90 companies were at 13/34, Main Arya Samaj Road, Karol Bagh and their former office was at 203, Dhaka Chambers, 2069/39, Naiwala, Karol Bagh, New Delhi. 
These companies were not carrying on any genuine business. The directors were employees of Mr Goyal, and were working as peons and receptionists. Entries in the books were bogus. The modus operandi in such cases is that cash is first deposited in the bank account of one such company, which is then then transferred/ circulated within the group companies before the cheque is issued to the beneficiary.
The assessing officer had asked NDR Promoters to produce the directors of the shareholder companies for examination after recording:-
(i) most of the directors in their statement recorded by the investigation wing had admitted that they had signed documents/papers on the direction of Tarun Goyal.
(ii) Shares of face value of Rs10 were issued at a premium of Rs40 (total Rs50). There was no justification and reason for a third person to purchase shares in NDR Promoters and to pay a substantial premium.
(iii) NDR Promoters had shown receipts of Rs16.38 lakh and Nil income in the year ending 31 March 2008 and 31 March 2007, respectively. There were no fixed assets and NDR Promoters had incurred expenses amounting to Rs12.17 lakh and Nil in the year ending after those two years.
The AO asked a bunch of pertinent questions like how and when the dealings had started with the shareholder companies; whether the promoters were known to each other directly or indirectly in which who was the introducer; since when the introducer was known; whether the applications for allotment of shares were received in one lot or on different dates and whether they were received by hand or by post. 
He also asked whether the acknowledgement was issued with supporting evidence; provide the proof if any offer letter was received or issued; whether stamp duty was paid on allotment of shares; whether the share certificates were delivered by hand or by post. If by hand, he asked for details of the person who had delivered the certificates. If share certificates were issued by post, state whether they were received back; indicate whether annual reports, balance sheet or notices of AGM/EGM of the respondent-assessee company were sent to the shareholders.
NDR Promoters did not produce the directors for examination. Other details and particulars were also not filed as required and demanded by the AO. 
The AO made an addition of Rs1.51 crore as unexplained cash. He observed that no prudent businessman would invest in the shares of NDR Promoters at five times the face value of shares. There was sufficient evidence to indicate and infer that beneficiaries, i.e., NDR Promoters had introduced income from undisclosed sources into their business under the garb of share capital/share premium.
The addition was deleted by the commissioner of I-T (appeals). His logic was that the respondent-assessee had not been able to establish the identity, creditworthiness of the shareholders and genuineness of the transactions in terms of several decisions the Court, including CIT vs Oasis Hospitalities Pvt Ltd, decided on 31 January 2011. He held that once documents like PAN or bank account details were given, then the onus had shifted on the AO and it was up to him to reach the shareholders. This burden could not be passed on to the assessee, merely on the ground that the summons issued to the shareholders were returned. 
The AO had issued notice under Section 133(6) of the Act and in response had received replies confirming the investment. The shareholder companies were incorporated and had invested money through banking channels which was reflected in the books. Investment was proved by the bank statements that disclosed sufficient balance before cheques were issued. Accordingly, the three requirements, i.e. identity of the investor, creditworthiness of the investors and genuineness of the transactions were satisfied.
The revenue department appealed against CIT’s decision which was dismissed by Income Tax Appellate Tribunal (ITAT), which made the same points as the CIT (Appeals). He cited cases such as CIT vs Rakam Money Matters Pvt Ltd and CIT vs Victor Electrodes.
The counsel for NDR submitted that once the assessee had been able to show that the shareholder companies were duly incorporated, their identity stood established, genuineness of the transactions stood established as payments were made through account payee cheques/bank account; and mere deposit of cash in the bank accounts prior to issue of cheque/pay orders, etc would only raise suspicion and, it was for the AO to conduct further investigation, but it did not follow that the money belonged to the assessee and was their unaccounted money which had been channelled.
Justice Khanna pointed out that there are two sets of judgements and cases to refer to, in cases of suspected bogus entries. In one set of cases, the assessee produced the necessary documents/evidence to show and establish the identity of the shareholders, the bank account from which payment was made, the fact that payments were received thorough banking channels, filed the necessary affidavits of the shareholders or confirmations of the directors of the shareholder companies, but thereafter no further inquiries were conducted. 
The second set of cases are those where there was evidence and material to show that the shareholder company was only a paper company having no source of income, but had made substantial and huge investments in the form of share application money. The assessing officer has referred to the bank statement, financial position of the recipient and beneficiary assessee and the surrounding circumstances. The primary requirements, which should be satisfied in such cases is, identification of the creditors/shareholder, creditworthiness of creditors/shareholder and genuineness of the transaction. These three requirements have to be tested not superficially but in depth having regard to the human probabilities and normal course of human conduct.
Certificate of incorporation, and PAN number are relevant for the purchase of identification, but have their limitation when there is evidence to show that the subscriber was a paper company and not a genuine investor. 
As was held in Supreme Court in CIT vs Durga Prasad More [1971] 82 ITR 540 (SC): “The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were required to look into the surrounding circumstances to find out the reality of the recitals made in those documents.”
In Nova Promoters and Finlease (P) Ltd (supra), the Division Bench has held that “The tribunal also erred in law in holding the Assessing Officer ought to have proved that the monies emanated from the coffers of the assessee-company and came back as share capital. Section 68 permits the Assessing Officer to add the credit appearing in the books of account of the assessee if the latter offers no explanation regarding the nature and source of the credit or if the explanation offered is not satisfactory. It places no duty upon him to point to the source from which the money was received by the assessee.” 
In A Govindarajulu Mudaliar vs CIT (1958)  34 ITR 807, Venkatarama Iyer, J, speaking for the court observed, “Whether a receipt is to be treated as income or not, must depend very largely on the facts and circumstances of each case…There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the income-tax Officer is entitled to draw the inference that the receipts are of an assessable nature.”
In essence, the view taken by the ITAT that the AO is responsible to prove that the transactions were not bona fide, is contrary to the law laid down by the Supreme Court. The statements of Mukesh Gupta and Rajan Jassal, the entry providers, explaining their modus operandi to help the assessee’s having unaccounted monies convert the same into accounted monies, affords sufficient material on the basis of which the AO can be said to have discharged the duty. 
The names of several companies, which figured in the statements given by the entry providers to the investigation wing, also figured as share-applicants subscribing to the shares of the assessee-company. Justice Khanna pointed out that “these constitute materials upon which one could reasonably come to the conclusion that the monies emanated from the coffers of the assessee- company. The Tribunal, apart from adopting an erroneous legal approach, also failed to keep in view the material that was relied upon by the Assessing Officer. The CIT (Appeals) also fell into the same error. If such material had been kept in view, the Tribunal could not have failed to draw the appropriate inference.”
He went on to point out that “The present case would clearly fall in the category where the Assessing Officer had not kept quiet and had made inquiries and queried the respondent-assessee to examine the issue of genuineness of the transactions.” 
The Tribunal, unfortunately, did not examine the said aspect and has ignored the following factual position:-
(a) The shareholder companies were all located at a common address. 
(b) The total investment made by these companies was Rs1,51,00,000, which was a substantial amount.
(c) Evidence and material on bogus transactions found during the course of search of Tarun Goyal. Evidence and material that the companies were providing accommodation entries to beneficiaries was not considered.
(d) The findings recorded in the assessment order were strong.
“1. From the findings of the search, it is evident and undeniable that all the companies including the alleged shareholders companies belong to Tarun Goyal. This is enforced even more from the following:-
i. All the companies are operated from the-office premises of Tarun Goyal.
ii. All the directors are either his employees or close relatives. Tarun Goyal could never produce the directors nor furnish their residential address.
iii. The statement of employees of Tarun Goyal is, on record, whereby they have clearly stated that they signed on the papers produced before them by Tarun Goyal. They do not know about the basic details of the companies like shareholding patterns, nature of business of these companies etc. 
iv. The statement of auditors of Tarun Goyal is on record. They have stated to have never meet (sic) the directors of the companies and audited the accounts only on the directions of Tarun Goyal. As per the statement of auditors, the employees of Tarun Goyal were directors of the companies run by them, also they could not ascertain the so called share capital subscribed by Tarun Goyal as documentary proof of the same was lacking.
v. During the course of the search, all the passbooks, cheque books, PAN cards etc. were always in the possession of Tarun Goyal. On his directions all the employees signed all the documents.
vi. All the bank account opening forms appear to be in the handwriting of Tarun Goyal.
vii. All the books of accounts of all the companies have been retrieved from the computers/laptop of Tarun Goyal.
viii. Tarun Goyal has given letters for the release of bank accounts of companies put under restraints after the search. No such application was received from the so called directors of the companies.
ix. Tarun Goyal appears in all the scrutiny assessments as well as appeals of his companies himself before various income tax authorities. From the verification carried out in respective wards/ circles where the above mentioned companies are assessed, it is evident that Tarun Goyal is appearing in all the income tax proceedings on behalf of all the companies. He is not charging any fees for appearing in these cases.
x. During the post search investigation it was revealed that besides aiding and abetting the evasion of taxes, Tarun Goyal has also been indulging in violation of other provisions of the law of the land. This matter has also been taken up by REIC for multi-agency probe.”
“In view of the aforesaid factual position, we have no hesitation in holding that the transactions in question were clearly sham and make-believe with excellent paper work to camouflage their bogus nature. Accordingly, the order passed by the Tribunal is clearly superficial and adopts a perfunctory approach and ignores the evidence and material referred to in the assessment order. The reasoning given is contrary to human probabilities, for in the normal course of conduct, no one will make investment of such huge amounts without being concerned about the return and safety of such investment.” 


Balraj Amaravadi
4 years ago
I feel, this problem exits through out the word! and this corruption( if i may use the word) is there in one form or the other.

Question is - why these people are doing this?

As you know, no functional system can be 100% proof and so, the change has to come from each person!
Meenal Mamdani
4 years ago
Commissioner of I-T (appeals) and Income Tax Appellate Tribunal (ITAT) person are clearly at fault as they ignored obvious red flags and went by the letter of the law.

One wonders if these 2 persons were truly incompetent or were bribed to come to this conclusion.

Surely their assets should be probed before they pass further judgments.
tapan sur
4 years ago
Yes very true for a long time before 2014, such entries used to take place to hide earnings and pay taxes. As a country, we never tried to take care of the basic problem of why such things used to take place. Even today, we do not have a time limit on clearing files from a babus desk, leading to many underhand dealings. Till today in many places, we do not have a true & market circle rate for the housing sector, leading to many underhand dealings. Digitisation and laws implemented after 2014, has brought down many problems of hiding earnings, but we still need to do lots in governance, and then expect everything to be 100% perfect to the book when it comes to the common man.
Aditya G
4 years ago
Honest tax payers are having to put up with such a lousy redressal system. In this case, the ITAT actually sided with the fraud *smh*. The I-T department are short staffed and overloaded with too much work, they cannot function properly. And our system is constructed in such a way that practically EVERYTHING goes up all the way up to court, rendering the Appeals & AO system irrelevant.

And the courts are choosing to dilly dally with religious sentiments instead of focusing on real issues -- like how screwed their own system is. And they're saddled with years of backlog, which is stacking up by the thousands every single day. Imagine how many I-T cases like this are stuck at courts (and some of them possibly involving honest tax payers). I don't know, and don't really want to imagine!
Free Helpline
Legal Credit