TMI Blog2000 (1) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... s including interest payment of Rs.1500. This order of assessment was revised by CIT-III, New Delhi after due notice to the assessee by setting aside the assessment order with the direction that assessment be reframed after making proper and appropriate enquiries in the light of facts and circumstances discussed by him vide order dated 11-2-1988. Consequent upon setting aside of the order of assessment the Assessing Officer initiated fresh proceedings. During the course of hearing assessee was required to file the addresses, copy of share application forms and banks' scroll. Apart from this other details were also stated to have been filed before the Assessing Officer. These details were required in connection with the subscribed position of the capital which was found by the Assessing Officer as under: ---------------------------------------------------------------------------- No. of shares Amount ---------------------------------------------------------------------------- Subscribers 700 7,000 Promoter's quota 97,300 9,73,000 Publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Chand Nolakha, East India Transport Agency, Shri Gangha Shahar, Rajasthan. 10. Chander Singh 350 -do- H. No. 978, Sector 4, Gurgaon 11. Amamath Bansal 350 -do- Brijmohan Gupta, H.No. 2781, Tilak Bazar, Delhi 12. Pushpa Mishra, 350 -do- H. No. 883, H.B. Colony, Faridabad. ----------------------------------------------------------------------------- 4. Since vide order dated11-2-1988CIT had directed the Assessing Officer to enquire into the share capital of 24,80,000 which was issued, subscribed and paid up. Assessing Officer sent query letters to 12 parties and not to all the persons numbering about 600. These letters were sent by registered post. The same were received back from parties mostly unserved or no replies were received. In view of these facts and citing the case of McDowell Co. Ltd v. CTO [1985] 154 ITR 148/22 Taxman 11 (SC), the entire amount of share capital was treated as income from undisclosed sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... December, 1983along with detail account from bank for the receipt of such payment. Further, the assessee had provided the copies of the share application money received by the company. 6. It was vehemently urged that the inquiry of the Assessing Officer about the source of the investment is unauthorised and uncalled for in the assessment of the company. Further reliance was placed on ITAT decision as referred to supra where the facts were similar and it was held that law does not entitle the ITO to insist upon appellant/assessee that he should not only prove the source but also source of source. It was further explained that shareholders whose names were duly registered in the register after having made the investment, could not deny that they had not subscribed to the shares in their names and if they could not deny, it was for them and not for the company to account for the source of investment in their own assessment proceedings and not in the assessment proceedings of the company. The Hon'ble Members of ITAT also held that consideration of section 68 does not affect the finding that enquiry from the company about the source of investment of its shareholders in the shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h he has failed to prove, therefore, Assessing Officer was fully justified in treating the entire investment made in the share capital to be the income of the assessee from undisclosed sources and CIT(A)'s placing reliance on the case of ITAT in the case of Standard Cylinders (P.) Ltd is not proper as the said decision stands overruled by jurisdictional High Court in the case of Sophia Finance Ltd. It was urged for restoration of order of Assessing Officer while setting aside the order of CIT(A). Reliance was also placed on 'E' Bench decision in the case of Shree Shyam Tools (P.) Ltd v. Asstt. CIT [IT Appeal No. 242 (Delhi) of 1989] decided in August, 1994 whereby addition made u/s 68 with regard to amount received by the assessee-company on issue of shares to the shareholders was held to be justified in treating such investment as income of the assessee u/s 68 of the Income-tax Act. 9. Learned counsel for the assessee, on the other hand, strongly supported the order of CIT(A) and pleaded that every possible detail, whatsoever was asked for, was filed with the Assessing Officer at the time of making original assessment and necessary copies of documents as demanded were also filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreover, this is a case of share capital credited in the assessee's account books and proper explanation has been filed so there could be no addition u/s 68 of the Act. It was also submitted that once credit appear in the bank account and bank is an agent of shareholder and it is not the assessee's agent. Action by Assessing Officer was not justified and same has rightly been set aside by the first appellate authority. It was urged for confirmation of order of CIT(A). To counter this the learned DR submitted that it is not disputed that the confirmations were filed but few of the persons, who subscribed for share capital, are income-tax assessees and in the absence of any confirmation from those parties who are not even income-tax assessees, therefore, it was contended that the Assessing Officer was justified in treating the investment in share capital as income of the assessee from undisclosed sources. Reliance was placed on CITv. United Commercial Industrial Co. (P.) Ltd [1991] 187 ITR 596/56 Taxman 304 (Cal.) and it was urged for restoration of order of Assessing Officer. It was also submitted that assessee is challenging the action of CIT in setting aside the order of origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t confirmation from shareholders categories 1, 2, 3A were filed by the assessee vide letter dated 16-3-1985 and further submitted that assessee had also filed 52 confirmations selected by the Income-tax Department from the shareholders under category 3B on 17th September, 1985 and requested the Assessing Officer to consider the shareholders of the company as genuine. Further to this letter, allotment letter in all the 52 cases were also furnished at the time of original assessment. From the record we find that assessee has tried to give as many details as were practically possible for him to file before the Assessing Officer. Therefore, in view of the facts and circumstances and decided cases on the point, we are of the view that the action of CIT(A) in holding that Assessing Officer was not justified in making disallowance of an amount of Rs.24,80,000 as unexplained income of the assessee from undisclosed sources is justified and his order is free from any infirmity, therefore, calls for no interference at our hands. Therefore, his action is confirmed and this appeal of the revenue, gets dismissed. 11. In the result, appeal is dismissed. Per Nathu Ram, A.M. - I have carefull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by a large number of investment companies inDelhiof laundering unaccepted money through the device of bogus or benami subscription by raising capital through public issue. In other words, the modus operandi adopted by these companies is that of introducing unaccounted money through bogus or benami share holders. The money belonging to the companies or to the promoters of the company is given to the shareholders who in turn arrange for share applications in bogus or benami names by way of share applications from the so-called shareholders. Investigation made in respect of many other similar investment companies revealed that such shareholders either did not exist or were merely name lenders. At the time when the ITO made the assessment, the facts relating to this racket were well-known. Subsequently, a large number of such companies surrendered part of their capital under Amnesty Scheme during the year. 1986-87. In respect of many other such companies enquiries revealed that either the shareholders did not exist at the addresses given or that they were mere name lenders. In such circumstances it was the duty of the ITO to have made enquiries in regard to the share capital raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of the company. In such circumstances the ITO was duly bound to enquiry into the source of the sums so credited. Section 68 of the Income-tax Act will come into play in regard to the sums so credited in the books of account. In the circumstances it was the duty of the ITO to enquire source of the sums so credited. It is clear from the records that no enquiries were made in this regard. The ITO having not conducted these enquiries failed in his basic duty. In the circumstances as per the ratio laid down by the Delhi High Court in the case of M/s. Gee Vee Enterprises Pvt. Ltd v. Additional CIT-I and others reported at 99 ITR 375, such non-enquiry made the assessment erroneous and also prejudicial to the interest of revenue. 6. In view of the facts and circumstances as mentioned above, I am of the view that the ITO failed to make basic enquiries in this case before completing the assessment. Such lack of enquiries by the ITO made the assessment erroneous and prejudicial to the interests of revenue." 2.2 The assessee has not challenged the order of the CIT passed under section 263 before the Tribunal and the same has thus become final. 2.3 The Assessing Officer in consequenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cal.) and McDowell Co. Ltd's case came to the conclusion that the assessee failed to give satisfactory explanation in respect of the entire share capital of Rs.24,80,000 and, accordingly, the amount was deemed as income under section 68 of the Income-tax Act for the current year. 2.5 On appeal it was contended that the act of the Assessing Officer in picking up only 12 out of about 600 shareholders is not a true sample of the basic mass. It was also claimed that the company is a juristic person and it is different from an individual or a partnership. As per the company law, it maintains register of shareholders and submitting annual returns incorporating the changes in the register to the Registrar of Companies. The Company is not authorised to seek information about the personal data given in share application form and source of investment from its shareholders. It is the responsibility of the shareholders to intimate change, if any, in their postal addresses. The onus cast on the company stands discharged as soon as it refers to the credits of persons who are its shareholders and whose names are registered in the register of shareholders, as has been held by the Tribunal in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pointed out that reliance has been placed by the CIT(A) on the order of the Tribunal in the case of Standard Cylinders (P.) Ltd and therein a view similar to that taken by the Delhi High Court in the case of CIT v. Steller Investment Ltd [1991] 192 ITR 287/59 Taxman 568 has been taken. The learned D.R. pointed out that the afore-cited decision of the Hon'ble Delhi High Court has since been overruled in the Full Bench decision of the Delhi High Court in the case of Sophia Finance Ltd. wherein the Hon'ble High Court has taken the following view: "The Income-tax Officer would be entitled to enquire, and it would indeed be his duty to do so, whether the alleged shareholders do in fact exist or not. If the shareholders exist then, possibly, no further enquiry need be made. But if the Income-tax Officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons. The use of the words 'may be charged' (emphasis added) in section 68 clearly indicates that the Income-tax Officer would then have the jurisdiction, if the facts so warrant, to treat such a credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the shareholders. Thus the onus cast upon the assessee stands fully discharged and under the circumstances the Assessing Officer was not justified in treating the whole of share capital amount of Rs.24,80,000 as deemed income of the assessee-company invoking provisions of section 68 of the Income-tax Act. In support he placed reliance on the decision of the Hon'ble Supreme Court in the case of CITv. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78 wherein on furnishing of letters of confirmation, discharge hundies, particulars of creditors, GIR numbers and where notice issued to creditors came back with endorsement 'left' the Department made no further attempt to examine the source of credits, the onus cast upon the assessee was held as discharged. He further placed reliance on the decisions in the cases of Addl CITv. Bahri Bros. (P.) Ltd [1985] 154 ITR 244 (Pat.); and Mather Platt (India) Ltd's case where the payments made through account payee cheques/drafts and cash through bank of the brokerage and rather payment of loans the onus cast was held as discharged about the genuineness of the claim, expenditure claimed and cash credits. The learned counsel has further placed reliance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the original assessment order the Assessing Officer has mentioned that shareholders of promoters category are all income-tax assessees and their confirmations have been filed. Details of such shareholders are placed at pages 113 to 115 of the paper book and their confirmations are at pages 116 to 134. The number of such shareholders is 19 and as per the details furnished 14 of them have been shown as existing assessees giving their PAN/GIR numbers. The remaining five are not existing assessees. The assessee-company has also filed confirmations relating to seven subscribers placed at pages 105 to 112 of the paper book but except one, six of them are not existing assessees. Apart from these, the assessee also filed details of 52 shareholders out of the public issue at the time of original assessment and furnished copies of their letters of allotment and confirmation of few of them had also been filed. The details of other shareholders having shares up to 1,000 in public issue are placed at pages 143 to 212 of the paper book and their number comes to 537 involving 1,33,700 shares of the face value of Rs.13,37,000. As per details given, they claimed to have paid the share money th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them and not for the assessee to account for the source of investment in their own assessment proceedings and not in the assessment proceedings of the assessee. Therefore, a consideration of section 68 also does not affect the finding that the enquiry from the assessee about the source of investment of its shareholders in the shares of assessee was unauthorised and uncalled for in the assessment of the assessee. Therefore, the Commissioner was in error in holding that since an enquiry was not made by the ITO regarding the source of investment in the shares of persons who were registered as shareholders and whose names were entered in its register of shareholders his order was erroneous and prejudicial to the interests of the revenue." 5.4 The Hon'ble Delhi High Court in its Full Bench judgment in the case of Sophia Finance Ltd has, however, held the view that the Assessing Officer is entitled and it would indeed be his duty to enquire whether the shareholders do in fact exist and in case the Assessing Officer finds that the alleged shareholders do not exist then in effect it would mean that there is no valid issuance of share capital. The shares cannot be issued in the names of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee-company rather in its letter dated 25th January, 1985 addressed to the Assessing Officer maintained that the paid up share capital also includes promoters quota for which individual confirmations have been filed and no efforts have been made by the Assessing Officer to verify the promoters quota as well as corporate investors. Moreover, out of the 12 registered letters issued to individual shareholders four have been served. It was also claimed that these shares were issued in 1983 and individuals may or may not be sitting at the same address for six years and with any stretch of imagination they cannot be considered as not genuine. It would thus be seen that though the assessee-company filed confirmations from as many as 85 shareholders, it made no efforts to establish the identity of other shareholders by way of filing their confirmation or producing them before the Assessing Officer. The Assessing Officer also neither made any verification about the confirmations filed nor doubted their genuineness nor he required the assessee-company either to produce them for examination or to make direct enquiries about them through internal source. Further, the Assessing Officer wrote to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the learned Members of the Bench who heard this appeal. There was no unanimity among the learned Members even for identifying the point of difference. According to the ld. Judicial Member, the following is the point of difference of opinion:-- "Whether, on the facts and in the circumstances of the case, the order of the learned CIT(A) should be upheld or it should be set aside and restored on the file of the Assessing Officer to be made de novo?" 2. According to the learned Accountant Member, the point of difference of opinion is as under:-- "Whether, on the facts and circumstances of the case, the order of the CIT(A) based on the Tribunal's decision in the case of Standard Cylinders Pvt. Ltd. be upheld as proposed by the Judicial Member or the matter be restored to the Assessing Officer for readjudication in light of Jurisdictional High Court decision in the case of Sophia Finance Co. as viewed by the Accountant Member?" 3. Consequent to the disagreement between my learned colleagues, the Hon'ble President of the Tribunal, in exercise of power conferred on him by section 255(4) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') has referred the matter to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmations are said to have been obtained on at randum basis from certain share holders either through the assessee or writing directly to shareholders. With such observations the Assessing Officer accepted the share capital as genuine and the assessment was completed at a net loss of Rs.29,898 on28th February, 1986under section 143(3)." 4.4 The ld. CIT, Delhi-III,New Delhi, however, set aside this assessment vide order under section 263, dated11-2-1988. The relevant portion from his order has been reproduced in para 2.1 of the order of the ld. A.M. It would be appropriate to extract below the portion of the order of the ld. CIT summing up his order:-- "It is no doubt true that the company is a juristic person separate and distinct from the shareholders. But this fact cannot be made the ground or justification for non-enquiry in regard to the genuineness and credit worthiness of the shareholders because it is quite possible for a company to launder unaccounted money and introduce the same in the books of account of the company in the garb of share subscription received from the so-called shareholders. A separate and distinct corporate existence cannot be made a medium for in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement due and the remarks/results reproduced are on the basis of postal authorities. The test check carried out by way of enquiries has been brought to your notice within the terms of section 142(3) of the Act. Under these circumstances the entire shareholding cannot be considered as a genuine. You are, therefore, given show cause opportunity by the entire amount of issued, subscribed and paid up capital of Rs.24,80,000 be not treated as the assessee coys, income from un explained sources." (iii) After the issue of the above letter and after holding discussion on certain dates with the representative of the assessee-company and pointing out to the failure of the assessee to appear on certain dates, the Assessing Officer concluded that the assessee had nothing to prove the genuineness of the share capital and had failed to discharge the burden of proof that lay on it under section 68 of the I.T. Act. By referring to certain judicial decisions on this aspect, including the decision of theApex Courtin the case of McDowell Co. Ltd, the Assessing Officer held that the entire amount of the share capital of Rs.24,80,000 remained unexplained within the terms of section 68 and was liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o copies of share applications through which money was received by it. (iv) In assessment proceedings initiated consequent upon the order passed by the CIT under section 263, details of share capital, giving description, number of shareholders, amount etc. was filed and it was submitted that confirmation from shareholders of categories (1), (2) and (3A) were filed by the assessee vide letter dated 16-3 1985. On17-9-1985, it had further submitted 52 confirmations in respect of shareholders under category 3B selected by the Income tax Department. Further to this letter, allotment letters in all the 52 cases had also been furnished. Thus, the assessee had tried to give as many details as were practically possible for it. 8. The ld. AM has, however, concluded as under:-- "Thus, looking to all the facts and circumstances discussed I do feel that the assessee-company failed to discharge its onus cast to establish the identity of all shareholders nor the Assessing Officer made due and valid enquiries about the identity of remaining shareholders. It would, therefore, be fit and proper if the matter is restored to the file of the Assessing Officer for fresh adjudication. I, accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed nor doubted their genuineness. Also, he neither required the assessee-company to produce the persons for examination nor made direct enquiries about them through internal source. (v) Only 12 shareholders were selected at random for seeking information or confirmation as per provisions of section 133(6) of the Act but the Assessing Officer made no efforts to make similar enquiries about other shareholders. 9. In the background of the facts of the case narrated above, I have first to determine as to what is the real point of difference of opinion. From the question suggested by the ld. AM, it is quite evident that he has gone by the fact that the order of the ld. CIT(A) was based on the Tribunal's decision in the case of Standard Cylinders (P.) Ltd. This may be true but then the ld. CIT(A) has also recorded a finding of fact that the assessee had tried to give as many details as was practically possible for it to file in connection with the issue of shares. A significant aspect is that even if the ld. CIT(A) had decided the issue in the light of Tribunal's decision in the case of Standard Cylinders (P.) Ltd, the Tribunal was legally bound to decide the issue in the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the circumstances of the case, the conclusion arrived at by the ld. JM was neither unreasonable nor perverse nor based on no evidence and hence it should be upheld. The ld. counsel further submitted that the settled proposition of law is that nobody can be allowed to take advantage of his own lapse and even if the Assessing Officer had failed to make certain enquiries, as is pointed out by the ld. AM, he could not be allowed to make good of the deficiencies of his case. The ld. counsel thus supported the order of the ld. JM. 12. I have given my utmost consideration to the entire gamut of facts and circumstances of the case and the detailed submissions made before me by the representatives of the rival parties. I have also carefully gone through the orders passed by the ld. Members alongwith material on record to which my attention was invited. In my view, there is no justification forrestoring the matter to the file of Assessing Officer and the Revenue's appeal needs to be dismissed, for reasons ascribed hereinafter. (1) It is, no doubt, true that after the Full Bench decision of the Hon'ble Delhi High Court in the case of Sophia Finance Ltd, the ITAT's decision in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the shareholders existed or not. The material placed by the assessee suo motu or brought by the Assessing Officer on record on enquiries made by him in this direction reveals the following facts:-- (a) In the first assessment order, as would be seen from the extract given from the ld. AM's order in para 4.3 above, shares worth Rs.9,73,000 were allotted under promoters quota and the Assessing Officer had observed that shareholders of this category were Income Tax assessees and their confirmations were filed. Obviously, there is no ground to say that such shareholders did not exist. The Assessing Officer had also observed that shares of Rs.1,63,000 were held by 7 persons who were also existing assessees and their confirmations were filed. Hence, the existence of these shareholders was also proved. Thus, for the subscribed capital to the extent of Rs.11,36,000, no addition could be made even as per the decision in Sophia Finance Ltd case. During the course of reassessment proceedings, the Assessing Officer had not communicated anything to the assessee-company as to why he was going back from his earlier findings. Letters were not issued to all the shareholders falling in the publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company filed confirmations from as many as 85 shareholders, it made no efforts to establish the identity of other shareholders by way of their confirmations or producing them before the Assessing Officer. It was not obliged to do so suo motu and it was not asked to do so by the Assessing Officer, who chose to enquire about 12 shareholders only. (e) The observation of the ld. AM that the Assessing Officer also neither made any verification about the confirmations filed nor doubted their genuineness nor he required the assessee company to produce them for examination nor he made direct enquiries about them, cannot be held against the assessee. For Assessing Officer's failure to do his job properly, when he had full opportunity to do so, he cannot be given a third inning by restoring back the matter to him. Similarly, the observation that only 12 shareholders were selected at random for seeking information as per the provisions of section 133(6) of the Act and the Assessing Officer made no efforts to make similar enquiries about other shareholders cannot be a ground for restoring the matter to the Assessing Officer because nothing prevented the Assessing Officer from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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