TMI Blog1998 (4) TMI 154X X X X Extracts X X X X X X X X Extracts X X X X ..... ration, a registered firm was carrying on the same business which was now converted into public limited company. The company was set up with the authorised capital of Rs. 30 crores. It offered for public issue shares worth Rs. 11.4 crores and Rs. 3.8 crores value of shares were issued through promoters quota. 4. It is the case of the assessee-company that 4 Sapphire Group of companies, i.e., Sapphire Consultants (P) Ltd., Sapphire Fashions (P) Ltd., Sapphire Industries (P) Ltd. and Sapphire International (P) Ltd. have invested Rs. 75 lakhs each in the assessee-company by making application for allotment of shares. According to the assessee-company, share were allotted to the aforesaid four companies and the sources of investment in the cases of these four companies were subscription from several other companies in those four companies. 5. A search was conducted under s. 132(2) of the Act on 21st Nov., 1995, at the registered office of the assessee-company at 170/2C, A.J.C. Bose Road, Calcutta, and its various branches and the said search is said to have been concluded only on 17th June, 1996. Certain documents, shares, etc., were seized. Subsequent to the search and seizure p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ujari the matter was discussed and he informed that it was difficult to obtain the contribution to promoters quota, because of the lock-in-period of 5 years. It was his advice that he can get suitable contribution to our other companies' share capital so that those companies would ultimately make investment in shares of the Balurghat Transport Co. Ltd. under the promoters quota. He undertook to arrange from his own resources contribution to share capital. It was then agreed that the share capital contribution by or through K.C. Dujari would be purchased by us at a premium of Rs. 2.50 to Rs. 3.00 per share in December, 1995. 2.3. Accordingly, what we did was that we incorporated four companies, viz., Sapphire Consultants (P) Ltd., Sapphire Industrial (P) Ltd., Sapphire International (P) Ltd., Sapphire Fashions (P) Ltd. and through Mr. Dujari, we got sufficient contributions to the share capital of those four companies which in turn contributed to the share capital of Balurghat Transport Co. Ltd. It is necessary to state that these four companies were duly incorporated under the provisions of the Companies Act and relevant Memorandum and Articles of Association of these companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ters were common in all those cases. 8. All the information so gathered was put to Rajendra Sethia. He submitted that the statement, given under s. 132(4) of the Act is obtained when he was in a confused state of mind and the circumstances were such that he had no other alternative but to purchase peace with the Department by offering huge amount as undisclosed income, as per the direction of the Departmental authorities. It was further submitted that the four companies were in existence and the sources of sources were also proved by the assessee and, hence, addition of Rs. 3 crores is not maintainable in the hands of the assessee-company. However, the AO did not find the explanation of the assessee satisfactory in the light of the material collected by him. In making the addition of Rs. 3 crores, he observed as under: (a) 4 Sapphire companies made investments of Rs. 75 lakhs each as share application money under promoter's quota of Balurghat Transport Co. Ltd.; (b) 15 companies made investments of 3.04 crores on account of share application money in the four companies; (c) The entire fund of Rs. 3.04 crores of these companies came from the bank account of Khemka Co.; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. were amalgamated with Cactus Software (P) Ltd." Though it is the case of Mr. Sethia that amalgamation implies that the amalgamating companies must have existed before amalgamation and that the amalgamated company does presently exist, but it has already been proved conclusively that in this case the amalgamating companies did never exist nor do the amalgamated companies. (k) Sec. 383A of the Companies Act requires that companies having paid-up capital of Rs. 50 lakhs and above shall have a whole-time secretary. All the 15 companies have paid up capital exceeding Rs. 50 lakhs and yet have not complied with the said statutory requirement. Further, the companies had the same address on papers but neither the companies nor the directors could be traced and even the amalgamated companies Peacock Traders Exporters Ltd. and Cactus Software (P) Ltd. were not traceable. (l) In such a situation, on plea of amalgamation, Sapphire companies cannot be allowed to get away without discharging its onus to produce its shareholders. It could have produced Peacock Traders Exporters Ltd., Cactus Software (P) Ltd. and others but he did not do even that because the above companies were n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atural justice and, therefore, the assessment proceedings are liable to be quashed. Learned counsel for the assessee has taken us through the relevant portion of the assessment order to indicate that the material upon which the AO relied upon, were not brought to the notice of the authorised representative of the assessee-company but the discussion was with Rajendra Sethia only. Adverting to pp. 27 and 28 of the paper-book [MOU in Hindi and its translated version in English], learned counsel submitted that the MOU does not show that the assessee-company has introduced undisclosed income. The letter only indicates the discussion between Rajendra Sethia and K.C. Dujari in connection with promoters' quota shares of Balurghat Transport Co. Ltd. amounting to Rs. 300 lakhs and the consequent suggestion of Mr. Dujari to form four new companies. Learned counsel further submitted that Rajendra Sethia never admitted any undisclosed income of the assessee in his statement under s. 132(4) of the Act, inasmuch as, the statement obtained was in connection with Balurghat group of companies only. It was submitted that the impugned addition cannot be made in the hands of the assessee-company, inasm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO has retained the documents even beyond that period without any valid reason and since Rajendra Sethia was not aware of the contents of the seized document/material, he was compelled to make such statement under s. 132(4) of the Act. Adverting our attention to p. 313 of the paper-book (reply dt. 4th June, 1996, by Rajendra Sethia), the learned counsel submitted that the undisclosed income of the Sethia group would be only Rs. 1.3 crore as against Rs. 4.3 crores admitted earlier. He lastly submitted that in the block assessment, the AO has to confine himself to the material available on record and he should not make roving enquiries so as to make the addition, in view of the spirit of the special scheme introduced under Chapter XIV-B of the IT Act. He further submitted that even in regular assessment, such addition cannot be justified, in view of the fact that the assessee has proved the source of the fund. 10. On the other hand, learned Departmental Representative submitted that the search commenced on 21st Nov., 1995, and completed on 17th Jan., 1996. During the course of search, i.e., on 17th Jan., 1996, Rajendra Sethia admitted the undisclosed income in his statement u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence, it cannot be said that the assessee-company was not aware of the enquiry as all the details were put to him. It is the case of the learned Departmental Representative that the enquiries conducted by the AO having been put to Rajendra Sethia and since the assessee-company is aware of the particulars, the procedure is followed by the AO 'in substance' and merely because a notice was not directly addressed in the name of the assessee-company, the proceedings are not vitiated, in view of the provisions of s. 292B of the IT Act, 1961. As regards the return of seized material within 15 days, learned Departmental Representative submitted that the provision of s. 132(9A) applies from the date of conclusion of such proceeding and in the instant case, search was completed only on 17th Jan., 1996. As regards applicability of s. 68 of the Act, learned Departmental Representative submitted that the assessee offered an explanation which was not to the satisfaction of the AO in the facts and circumstances of the case and, therefore, the decision of the Full Bench of the Hon'ble Delhi High Court in the case of Sophia Finance Ltd. applies to the instant case. He further submitted that in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 11th Dec., 1995, itself and the 15 days for return of documents commences from the said date. In this regard he has taken us through Panchanama. He submitted that search proceedings having been completed on 11th Dec., 1995, the statement obtained from Rajendra Sethia on 17th Jan., 1996, cannot be considered as a statement under s. 132(4) of the Act. He further submitted that under s. 158BA of the Act, the words 'undisclosed income' are defined and looking to the scope of the special scheme, as considered by the Mumbai Bench of the Tribunal in the case of Sunder Agencies vs. Dy. CIT (1997) 63 ITD 245 (Mumbai), there is no scope for making presumptive addition. 12. We have carefully considered the rival submissions and perused the records and have also considered the legal position. The immediate impression that we have in our mind is that there is no justification for making an addition in the assessment of this assessee-company. It is an admitted fact on the basis of investigation carried out that the ultimate source of the funds invested in the share capital by the four companies of the Sapphire group came from the bank account of Mr. Khemka. Mr. Khemka is the 4th entity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her income has to be proved by the Revenue, as the burden is on it, on the basis of clinching evidence. That is why the taxing provision is required to be construed very strictly which again means the proof should be beyond doubt. In this case, we do not find any direct material from which only inference that can be drawn is that the undisclosed income did exist and the same belonged to the assessee. The MOU found at the time of search is only between Rajendra Sethia and Mr. Dujari and the same is also not on the letter head of the assessee-company. If at all it has to be inferred that there was a scheme to convert the black money, yet it cannot be said that this black money was of the assessee as the same was in the process of incorporation to start business. The money could be of anybody including Mr. Sethia, on basis of evidence gathered. 14. In the above context, when the burden is upon the Revenue to prove that a particular receipt is an income, somehow or the other, we do not know what role the provisions of s. 68 have to play. Because the provisions contain a fiction, that is to say a cash credit may be deemed to be taxable income if the AO is not satisfied about the expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re legally incorporated and separately assessed to tax. They are identifiable and capacity is not denied on the basis of cogent material. The source is proved by the assessee and in our opinion, the assessee cannot further be asked to prove source of the source and that too when deeming provisions are involved and again that too in the context of unearthing the undisclosed income of the assessee. 17. Some importance is given to the fact that Mr. Rajendra Sethia was representing in the assessment proceedings and the assessee never raised any objection in this regard. This fact is sought to be taken as going against the assessee. In our opinion, there can be another angle to look at this fact. If in reality funds were arranged by Mr. Rajendra Sethia, then obviously the assessee-company would hold Mr. Sethia responsible and it would be Mr. Sethia who would undertake to ensure that the assessee-company is not unjustifiably taxed on the funds arranged by him and, therefore, in the assessment proceedings certainly the assessee-company would allow him to represent and no objection would be raised. This aspect goes in favour of the assessee. It has to be remembered that prior to the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons to discharge initial onus is discharged by the assessee. AO left the enquiry half-way and did not find out actually who deposited amounts in the bank account of Khemka Co. The learned counsel, therefore, rightly relied upon the judgment of the apex Court in the case of Orissa Cement Corporation. 18. On the alternative ground of the assessee regarding lack of opportunity to rebut the findings on the basis of material gathered by the AO but not put to the assessee, we would observe that the importance of following principles of natural justice in making an assessment cannot be undermined. Procedure is not certainly a matter of secondary importance. In fact, the administration and quasi-judicial functions of an executive can be properly checked only by procedural fairness. The principle of giving an opportunity before using the material gathered adversely is now incorporated in the statute itself and this is provided in sub-s. (3) of s. 142 which says that the assessee shall, except where the assessment is made under s. 144, be given an opportunity of being heard in respect of any material gathered on the basis of enquiry by the AO and proposed to be utilised for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not made. He, therefore, submitted that the assessee has not incurred any expenditure and thus addition is not maintainable under s. 69C of the Act. In the alternative, learned counsel submitted that the expenditure is a kind of protection money paid to 'ULFA' so that the business of the assessee could be run smoothly and hence, the expenditure allowable as deduction under s. 37 of the Act, being wholly or exclusively incurred for the purpose of business. He further submitted that if the addition towards income from undisclosed source is confirmed, vis-a-vis ground 1 or 2, then this expenditure should be taken as having been incurred from the said undisclosed source and addition under s. 69C is liable to be cancelled even on that count. On the other hand, the learned Departmental Representative relied upon the order of the AO. 24. We have considered the rival submissions. Admittedly, a document is found during the course of search which indicates that the assessee incurred the expenditure. The statement of the learned authorised representative that the amount is not actually paid is a mere self-serving statement on the facts of the case. We are, therefore, of the opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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