1990 (10) TMI 130 - AT - Income Tax

Summary

Issues Involved:
1. Whether the order passed by the Income-tax Officer (ITO) was erroneous and prejudicial to the revenue.
2. Whether the ITO made the necessary and proper enquiries regarding the share capital raised by the company.
3. Applicability of Section 263 by the Commissioner.
4. The duty of the ITO to investigate the genuineness and creditworthiness of shareholders.
5. The extent of enquiry required by the ITO in the case of investment companies.
6. The relevance of piercing the corporate veil in tax assessments.

Detailed Analysis:

1. Whether the order passed by the Income-tax Officer (ITO) was erroneous and prejudicial to the revenue:
The Commissioner contended that the ITO's order was erroneous and prejudicial to the revenue because necessary and proper enquiries were not made regarding the share capital raised by the company. The Commissioner cited the decision of the Delhi High Court in Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 to support his position that the ITO should have conducted more thorough investigations to ascertain the genuineness of the shareholders and the source of the funds introduced as share capital.

2. Whether the ITO made the necessary and proper enquiries regarding the share capital raised by the company:
The assessee argued that all necessary materials were furnished to the ITO, including the list of shareholders, share application forms, and details of share issue expenses. The ITO had verified these documents, and the transactions were conducted through cheques, making it possible for the Department to trace the sources through the bank. The Tribunal agreed that the ITO had made the necessary enquiries under the circumstances, considering the information provided by the company.

3. Applicability of Section 263 by the Commissioner:
The Commissioner invoked Section 263, arguing that the ITO's failure to make proper enquiries rendered the assessment order erroneous and prejudicial to the revenue. However, the Tribunal found that the ITO had conducted the necessary enquiries and that the Commissioner had not demonstrated any specific error in the ITO's assessment order that would justify the application of Section 263.

4. The duty of the ITO to investigate the genuineness and creditworthiness of shareholders:
The Commissioner emphasized the need for the ITO to pierce the corporate veil and investigate the genuineness and creditworthiness of the shareholders. The Tribunal, however, noted that the company had provided all relevant information about the shareholders, and it was not within the company's authority to enquire about the sources of the shareholders' funds. The Tribunal cited the decision in Standard Cylinders (P.) Ltd. v. ITO [1988] 24 ITD 504, which held that a company is not authorized to seek information from its shareholders regarding the source of their investment.

5. The extent of enquiry required by the ITO in the case of investment companies:
The Tribunal acknowledged that while investment companies often attract unaccounted income, the extent of enquiry required by the ITO depends on the specific facts and circumstances of each case. In this case, the ITO had made sufficient enquiries based on the information provided by the company, and there was no indication that the company itself had generated unaccounted income.

6. The relevance of piercing the corporate veil in tax assessments:
The Commissioner argued that the ITO should pierce the corporate veil to bring unaccounted money to tax. The Tribunal disagreed, stating that the distinction between the company and its shareholders is a real legal distinction, not an artificial one. The Tribunal held that piercing the corporate veil is not appropriate in this case, as the company had just been incorporated and had not engaged in any significant trade activity.

Conclusion:
The Tribunal concluded that the ITO had made the necessary enquiries and that the Commissioner's order under Section 263 was not justified. The Tribunal set aside the Commissioner's order and allowed the appeal, emphasizing that the assessment of the company was not erroneous or prejudicial to the revenue.