TMI Blog1996 (10) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... ia basis but from the names of the shareholders it appeared that they were from Nasik region where the assessee-company was operating. He further noted that the share applications applied for shares were in the numbers of 400, 500 and 600 shares barring few applications whereas normally applications for share are for lots of 50, 100, 200, 300 and most of the applications are for 50 to 100 shares. The AO called for share register and share application forms and on their scrutiny he further found that most of the share applications were written in handwriting of 4 to 5 persons and signatures of subscribers were illegible. It also gave the impression that the subscribers were primarily of illiterate class. With a view to verify, the AO sent enquiry letter to the shareholders. A large number of letters were received from the shareholders. However, according to the AO, substantial number of letters issued came back with the remark "person non-existent or not available on addresses". He further noticed that all share applications were deposited in Canara Bank, Nasik, barring few exceptions and share application money was deposited in cash and not by cheque or bank draft. Further, the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 20 lakhs. The company further made donation of Rs. 5,15,000 to charitable institutions related to the promoters. 2.3. The AO also noted that several letters of shareholders came from the same post office and despatched on the same date. The registration numbers are in the serial order and that shows that the said shareholders came in a group and sent the confirmatory letters together from the same post office. He also noted that confirmatory letters also came from certain shareholders from whom no enquiry was made but they being employees of the sister concern of the assessee-company sent the confirmation letters suo motu. The AO also found certain letters intimating that they never subscribed to the shares. The assessee-company was confronted with a letter and statements recorded and in reply the assessee filed a letter from one of its persons denying the facts written in his letter to the AO. The subsequent letter so filed was not found reliable as the said shareholder was not produced for examination on oath. About the remaining shareholders the assessee gave no satisfactory reply. 2.4. In view of the facts and circumstances discussed above, the AO held that sum of Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of March, 1985, the company offered 1,20,000 equity shares of Rs. 10 each to the public subject to the terms set out in the prospectus issued by the company. Before coming out with the public issue necessary legal formalities under the Companies Act were complied with. Prospectus was filed with the Registrar of Companies, Gujarat, and listing application was made to Ahmedabad Stock Exchange on 2nd Feb., 1985. Ahmedabad Stock Exchange granted listing permission. PAM Consultants were appointed as managers to the issue in 1984 so as to process the planning and co-ordination of the public issue and they duly consented. Canara Bank was appointed as bankers to the issue and the bank gave necessary consent. Further, 13 brokers spread all over the country were appointed. Advertisements about the public issue were released in the newspapers and the same appeared in the Times of India and Gujarat Samachar. Prospectus and share application forms were despatched to various stock exchanges in the country. Canara Bank was authorised to collect application forms and application money. The learned authorised representative has further submitted that though efforts were made to attract general publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned in the assessment order about the genuineness of the public issue and the assessee gave detailed reply point to point in its letter dt. 29th March, 1990, running into 12 pages. 4.2. The learned authorised representative arguing further has contended that in the confirmation letter the shareholders have nowhere stated that they were approached to subscribe to the shares by people in employment of Sarda Group and motivated by friendship. As most of the subscribers were illiterate they took help of other persons to fill up the application forms. As regards their capacity to invest it has been submitted that the AO made the assumption that the annual income was Rs. 4,000 to Rs. 6,000 at the time of subscription and their present annual income was Rs. 9,000 to Rs. 13,000. The subscribers were required to pay only 50% at the time of application and the balance 50% was to be paid at the time of allotment of shares. So, in the case of application of 400 to 500 shares the shareholders in employment could easily invest Rs. 4,000 to Rs. 5,000 in two equal instalments of Rs. 2,000 to Rs. 2,500. The subscribers were either self-employed or serving somewhere and their income was also su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other relevant or admissible material to support the finding. 4.4. Arguing further it has been contended that the issue was genuine and not a single complaint was lodged under Companies Law or IPC or under any other law showing that the issue was bogus or non-genuine. The material on record proved that it is the applicants and allottees of shares whose names appear in company's register and they are the real and beneficial owners of the shareholding. He further referred to s. 68A of the Companies Act as per which any person who makes in a fictitious name an application to the company for accepting or subscribing for share or otherwise inducing the company to allot the share in fictitious name is punishable for a term which may extend to 5 years. Reference to this section has compulsorily to be given in the prospectus. According to the learned authorised representative no one is prosecuted for violation of this section and that implies that all the shareholders were genuine and identifiable. The learned authorised representative has also pointed out that on a reference made by the AO 66 shareholders have confirmed the purchase of shares to the office of the DDI, Nasik. The rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt but the proceeds were consumed in their household. 4.7. Taking the legal ground the learned authorised representative has submitted that the AO has not made the addition as per the deeming provisions of s. 68 but he has taxed Rs. 12,00,000 as business income of the assessee. When it is taxed as a business income the burden was on the Department to show that particular receipt is the income of the assessee-company. Such a burden has not been discharged by the Department. Even if it is assumed that s. 68 has been impliedly invoked by the AO the onus lying on the assessee stands discharged as identity of the shareholders, genuineness of transaction of share subscription and capacity of the subscriber has been established. Even if it is assumed for argument's sake that the capacity of the shareholders to invest has not been established to the satisfaction of the AO, addition cannot be sustained in view of the Full Bench decision of the Hon'ble Delhi High Court in the case of CIT vs. Sophia Finance Ltd. (1993) 113 CTR (Del) 472 (FB) : (1994) 205 ITR 98 (Del)(FB) read with decision of the same High Court in the case of Settler Investment Ltd. (1991) 99 CTR (Del) 40 : (1991) 192 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transaction and their capacity to invest has not been proved to the satisfaction of the AO and in view of the case law cited on behalf of the assessee the addition has rightly been made in view of the provisions of s. 68 of the IT Act. The learned Departmental Representative, therefore, pleaded that the addition made being fully justified requires no interference. 6. We have given careful consideration to the facts, material on record and the rival submissions made before us. We find that the assessee-company was originally incorporated on 22nd Oct., 1980, as a private limited company in the name of Rasbihari Tobacco Processors Pvt. Ltd. It was changed into a limited company as per order of the Asstt. Registrar of Companies, dt. 5th Sept., 1984, under the name and style of Rasbihari Tobacco Processors Ltd. The company was engaged in manufacturing of Bidi in the State of Andhra Pradesh. Its accounting year ended on 30th April of each year. The accounting year for the current asst. yr. 1987-88 has ended on 30th April, 1986. The first issue that arises is whether the public issue floated by the company was genuine. We find that on changing the company into public limited in 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Admittedly, almost the entire support came from Nasik region. There were 281 applications received out of which 273 applications were collected by Nasik branch of Canara Bank and of the balance 5 were from Delhi and 3 from Bombay. The issue was oversubscribed as the assessee-company received total amount of Rs. 6,90,250 on account of share application money. The amount so received was reflected in the balance sheet of the assessee-company as on 30th April, 1985, relevant to the asst. yr. 1986-87. The excess application money of Rs. 90,000 was however, refunded in the current asst. yr. 1987-88. This is evident from the documents filed at page Nos. 17 to 20 of the compilation. The assessee in the current year gave a call for payment of call money being Rs. 5 per share and the balance amount of Rs. 5,99,750 was collected Rs. 250 being calls in arrears. The company thereon issued allotment letter of shares to the subscribers and a specimen copy of the allotment letter is filed at pages 42 and 43 of the compilation. The assessee-company incurred expenses of Rs. 54,171 on share issue in the accounting year relevant to the asst. yrs. 1986-87 and 1987-88 details of which have been filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an associate concern. According to the assessee-company on account of termination of his services he took the opportunity to show the assessee-company in bad light. According to the assessee, the said letter was written to the AO by his pleader and in the submission made before the AO it was claimed by the assessee that the whole truth would come out if the person is examined in the presence of representation of the assessee-company with right to cross-examine. We find that the assessee-company was never afforded an opportunity to cross-examine Shri Gholap about the complaints made by him. We, however, note that he transferred his share to Sarda at face value. 6.2. Another such person was Shri Sanjay Pathak. According to the assessee-company, share application was signed by him. Money was paid by him and shares were also allotted to him. Here also the assessee-company asked the AO to give them an opportunity to cross-examine him but it so appears that nothing was done in this regard. According to the assessee-company, he also had an ulterior motive in making a damaging statement as he wanted to utilise the opportunity for settling his scores with the company in that he wanted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmatory letters received by the assessee-company were not sent by the real shareholders but the same were managed by the promoters in benami names. In the absence of any such material their identity stands established from the confirmatory letters sent by them. We also note that the DDI, Nasik, got such confirmatory letters from more than 60 shareholders and confirmatory letters received through DDI have been authenticated by the Inspector of Income-tax. The identity of the shareholders, therefore, stands established. 6.4 As regards the capability of the shareholders to invest, we note that all the shareholders in the confirmatory letters had given the source of investment in the shares such as income from proprietary business, salary, house property, interest income, agricultural income, etc. The AO has picked up income of certain shareholders at the relevant time at Rs. 4,000 to 6,000 but he has not considered the savings written by them from other sources like agricultural income, interest, house property, etc. in each and every case. Moreover, the investment in each case is not more than Rs. 5,000 and looking to the source given it cannot be said that the shareholders were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, in the case of CIT vs. Settler Investment Ltd. the Hon'ble Delhi High Court has held a similar view to the effect that if the shareholders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regarded as a capital receipt. As has been seen from the facts discussed above in the present case the shareholders are identified and it is also established that they invested money in the purchase of shares there being no evidence to prove to the contrary. The amount received as equity share money has therefore to be regarded as a capital receipt. 6.8. We also note that the AO in his order has highlighted certain unusual features of the public issue and having greatly influenced by that he treated the issue as not genuine and share money received as income of the assessee-company. Let us see how the features of the public issue were unusual as to draw such an adverse inference against the company. It is alleged that application were made for shares in numbers of 400, 500, and 600 whereas normally it should have been for 50, 100, 200, etc. We note that according to the terms of the prospectus the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akhs to Rs. 73 lakhs and it also declared dividend at 10%. Moreover, in the year under consideration the funds were raised through the public issue and there cannot be expectation for dividend in the very first year of the public issue. 6.9. Considering all the facts and circumstances involved, we have no hesitation in holding that the public issue raised was genuine and it was the shareholders who invested money in share and their identity is fully established. In this view of the matter, the share money received is held to be the capital receipt and addition made on this count is directed to be deleted. 7. The second ground raised by the assessee is that the learned CIT(A) erred in confirming the disallowance of Bardana purchase expenses amounting to Rs. 4,87,109. The assessee had shown purchase of bardana of the above amount from the following co-operative societies: Siddarth Bidi Producers, Sireilla Rs. 3,22,000 Raj Rajeshwar Bidi Producers Co-op.Society, Karimnagar Rs. 1,65,109 The bardana purchased was utilised for stacking tobacco. The payment made to the said societies was claimed to be through cheques. The enquiries made by the AO from Canara Bank reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and above the payment for bardana but the same has been accepted as genuine whereas purchase of bardana has been doubted. He has further made a submission that the AO made a reference to the ITO, Karimnagar enquiring about the genuineness of the bardana purchased and in turn the ITO, Karimnagar, made enquiries from the Presidents of the societies and as far as they know the ITO, Karimnagar, has sent a positive report to the AO confirming the purchase of bardana made. The copy of report of ITO, Karimnagar, obtained from the records of the AO has been placed before us for perusal. The learned authorised representative has further pleaded that the AO disallowed the claim of bardana purchases merely on suspicion and surmises and even on having a positive report from the ITO, Karimnagar, he has disallowed the said purchase amount. 9. The learned Departmental Representative on, the other hand, placed reliance on the orders of the lower authorities. 10. We have considered the facts, rival submissions and material brought on record. Admittedly, the assessee has made payments through cheques to Sinnar Bidi Udyog Ltd. on behalf of said two societies as per their instructions and thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oom for doubting the genuineness of the purchase of bardanas from the two societies. We accordingly, vacate the finding of the first appellate authority and direct the AO to delete the disallowance made on this count of Rs. 4,87,109. 11. The last ground raised by the assessee is that the learned CIT(A) erred in not directing the AO to give the assessee relief under ss. 80-I and 80HH on the income assessed in its hands barring its dividend income. We note that the assessee had taken an additional ground before the CIT(A) to the effect that there is a mistake in the AO's computation of relief under ss. 80HH and 80-I. The CIT(A), therefore, directed the AO to verify the assessee's claim and to give appropriate relief found due, if any, as per law after affording reasonable opportunity of being heard to the assessee. 12. The learned authorised representative of the assessee has made a submission that the assessee-company had no income other then income from manufacturing of bidi in the industrial undertaking where deduction under ss. 80HH and 80-I is claimed and the same has actually been allowed on the income declared. The AO however, made addition as business income on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vation that out of the equity share money of Rs. 12 lakhs, Rs. 6 lakhs pertained to the current asst. yr. 1986-87 and the AO was directed to verify the position and to take necessary action. The AO taking cognizance of such observation reopened the assessment for the current assessment year by issue of a notice under s. 148 of 9th Aug., 1991, and the assessee filed a return in response thereto on 16th Sept., 1991. The AO in consequence of the findings given in the asst. yr. 1987-88 made addition of Rs. 6 lakhs in the total income of the current year on account of the share application money. The first appellate authority on appeal confirmed the addition so made. 16. The learned authorised representative of the assessee, so far as the addition made of Rs. 6 lakhs is concerned, advanced similar and identical arguments and submissions as were made in the appeal for asst. yr. 1987-88. The learned authorised representative also made legal submissions challenging the reopening of the assessment for the current year and the same in brief are as under: (i) That the AO was requested to indicate reasons for issue of notice under s. 148 and precise nature of income which in his opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reassessment proceedings and in the absence of such notice the ITO has no jurisdiction to initiate reassessment proceedings. Such defect in the notice under s. 148 cannot be saved by the provisions of s. 292B as provisions of s. 292B cure irregularity and not illegality. (iii) That the original assessment was completed for the year under s. 143(3). All disclosure required by law was made during the original proceedings. There was no statutory requirement to furnish any information other than share application money which was shown in the balance sheet of the company under the head 'share capital'. Reference was made to the public issue in the audit report. Money was collected through Canara Bank. The assessee thus disclosed all primary facts relating to the public issue at the time of original assessment. The notice issued under s. 148 is beyond the expiry of four years from the year of assessment. There being no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment the proceedings initiated is out of time and the reassessment made was without jurisdiction and void. In support the learned authorised representative has cite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice whereas requirement of s. 148 is to file return within a period of not less than 30 days and the period allowed being not in conformity with the provisions of s. 148 notice issued is claimed to be invalid. It is mentioned in this regard that s. 148 has since been amended by the Finance Act, 1996, with retrospective effect from 1st April, 1989, by omitting therefrom the words "not being less than 30 days". With the amendment so made in s. 148 the notice issued under s. 148 requiring filing of return in the prescribed form within such period as specified in the notice is fully in accordance with the provisions of s. 148 and the objection raised in this regard has therefore no merit. (ii) It is claimed on behalf of the assessee that as per sub-s. (2) of s. 148 the AO before issuing notice was required to record reasons for doing so. The recording of reasons is mandatory before initiation of reassessment proceedings. The assessee at the level of the AO as well as CIT(A) demanded reasons recorded but to no avail. The learned authorised representative of the assessee also made a similar request before us requiring the Departmental Representative to furnish copy of the reasons r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 1,20,000 equity shares of Rs. 10 each through a prospectus. We are pleased to inform you that the issue is fully subscribed." It would thus be seen that necessary facts as per requirement of the Companies Act were disclosed in the audit report filed along with the original return of income and the assessee was not under any obligation to disclose anything over and above that. There was, therefore, no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment and accordingly, no action under s. 147 could be taken by issue of a notice under s. 148 beyond a period of four years from the end of the assessment year. Notice under s. 148 was admittedly issued beyond a period of 4 years from the end of the assessment year and the same was, therefore, invalid and reassessment made based on such notice does not deserve to survive. 18.2. Considering all the facts and circumstances discussed above, we are of the opinion that neither the reassessment proceedings initiated under s. 148 is valid nor the addition made of Rs. 6 lakhs is justified. The reassessment made is, therefore, directed to be cancelled. 19. The next ground raised is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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