1. This is Revenue's appeal against order of CIT(A)-I, New Delhi, dt.
25th September, 1990 relating to asst. yr. 1984-85 and following single ground has been raised : "On the facts and in the circumstances of the case, the learned CIT(A) has erred in law in deleting the addition of Rs. 24,80,000 without appreciating that on the basis of the material facts and provisions of s. 68 of the IT Act, 1961, the AO is competent to enquire into the sums credited in the books of account of the assessee." 2. Facts are like this that assessee is an investment company, he filed his return declaring a loss of Rs. 31,361 on 6th May, 1984 and assessment in this case was completed under s. 143(3) vide order dt.
28th February, 1986 at net loss of Rs. 29,898 by disallowing Rs. 1,500 out of expenses debited to P&L a/c under various heads including interest payment of Rs. 1,500. 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, dt. 11th February, 1988.
Consequent upon setting aside of the order of assessment the AO initiated fresh proceedings. During the course of hearing assessee was required to file the addresses, copy of share application forms and bank's scroll. Apart from this other details were also stated to have been filed before the AO. These details were required in connection with the subscribed position of the capital which was found by the AO as under :Subscribers 700 7,000Promoter's quota 97,300 9,73,000Public issuea) Over 500 shares 16,300 1,63,000b) Below 500 shares - 13,37,000 3.The assessee was asked to give the details of shareholders and their sources of investment. Enquiries were also made in respect of genuineness of the shareholdings in respect of public issue of Rs. 13,37,000 on random basis to the following shareholders : ---------------------------------------------------------------------- S. No. Name of the No. of shares Results of shareholders held inquiries ---------------------------------------------------------------------- 1. Bimla Devi Pungalia, Suraj 50 No reply received Udyog, Rani Bazar, Bikaner. 2. Mr. Inbel Bhoj, Pahed Ganj, - Returned unserved Hira Shri Gi Ka Rasta, Top Khu Hggure, Jaipur. 3. Mrs. Meena Devi Pangeri, H. 150 No reply received No.885, Sector-10, Faridababad. 4. Vinita Bhandari c/o 200 -do- V. M. Bhandari, Andhri Chandh Pole, Jodhpur. 5. Indra Mani Shah, Shah Bhavan, 200 Reply received for opp. Riwari Halwa, Ram Ganj extension of time Bazar, Jaipur. 6. K. C. Kudal, H-55, Sarojini 250 Returned unserved Nagar, New Delhi. 7. Phool Bani Sayed, Swiss Watch 300 -do- Co. Station Road, Bikaner. 8. S. C. Jain, Hindustan Electro, 500 -do- 44-41, Community Centre, New Friends Colony, New Delhi. 9. Mrs. Kiran Devi Nolakha, c/o 400 -do- Ramesh Chand Nolakha, East India Transport Agency, Shri Gangha Shahar, Rajasthan. 10. Chander Singh, H. No. 978, 350 -do- Sector 4, Gurgaon 11. Amarnath Bansal, Brijmohan 350 -do- Gupta, H. No. 2781, Tilak Bazar, Delhi 12. Pushpa Mishra, H. No. 883, 350 -do- H. B. Colony, Faridabad. ---------------------------------------------------------------------- 4. Since vide order dt. 11th February, 1988 CIT had directed the AO to enquire into the share capital of 24,80,000 which was issued, subscribed and paid up. AO 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. vs. CTO (1985) 154 ITR 148 (SC), the entire amount of share capital was treated as income from undisclosed sources under s. 68 of the IT Act.
5. Aggrieved by this action of AO assessee preferred appeal and it was pleaded before the first appellate authority that the act of AO in picking up only 12 out of around 600 shareholders is not a true sample of the basic mass. It was also submitted that in fact company is juristic person which is based on incorporation and registration under Companies Act, 1956. It is different from an individual or a partnership. A company vis-a-vis its shareholders is not what a partnership is vis-a-vis its partners under ss. 41, 146 and 150 of Indian Companies Act entails, the need maintaining register of shareholders and of making an annual return incorporating the changes in the register to the Registrar of Companies. It is nowhere mentioned that the company is authorised to seek information from its shareholders regarding the genuinity of the personal data as mentioned in the share application form as well as the source of their investment made in its shares. It is enough for the company to know if they have made subscription or investment in the shares of the company, number of shares subscribed and held and full particulars of address for future communication. Further it is the responsibility of the shareholder to inform to the company, if there is any change in the postal address. If the shareholder fails to fulfil his responsibility the company cannot be held responsible for such lapse on the part of the shareholder. If the company is not authorised to ask for the source from which the shareholders made the investment the ITO in the course of making the assessment could not ask the company to account for the source from which the shareholders met the cost of investment. It was further stated that AO was making the assessment of the liability of the company and not the liability of individual shareholder. The onus cast on the company stands discharged as soon as it refers to the credits of the persons who are its shareholders and whose names are registered in the register of shareholders.-Standard Cylinders (P) Ltd. vs. ITO (1988) 24 ITD 504 (Del). It was further contended that company is registered and incorporated under the Companies Act, 1956. The company has provided the list of shareholders along with their addresses as stood in its register of shareholders as on 31st December, 1983 along with details 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 AO about the source of the investment is unauthorised and uncalled for in the assessment of the company. Further reliance was placed on Tribunal 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 Tribunal also held that consideration of s. 68 does not affect the finding that enquiry from the company about the source of investment of its shareholders in the shares of the company was unauthorised and uncalled for in the assessment of the company. It was also submitted before the first appellate authority that order of CIT passed under s. 263 cancelling the assessment, was made without a correct appraisal of facts and was cancelled by Tribunal in the above noted case.
7. CIT(A) while accepting the plea of the assessee has observed in para 5 of her order that assessee has tried to give as many details as was practically possible for him to file before the AO. Keeping in view the finding of Tribunal order as referred to supra it was held by the first appellate authority that source of source cannot be looked into by AO.It was also observed that in case of an unexplained investment made by the shareholders, the matter can be enquired into only in the case of the individual shareholder and not in the case of company. Respectfully following the same, CIT(A) held that AO was not justified in making the disallowance of amount of Rs. 24,80,000 as unexplained income of the assessee, the Addition made came to be deleted.
8. Aggrieved by this action of CIT(A), Revenue has come up in appeal and learned Departmental Representative submitted that proper enquiries were not made at the time of making of original assessment so CIT was fully justified invoking the provisions of s. 263 for setting aside the order of assessment found to be erroneous and prejudicial to the interest of Revenue and further directing the AO to make proper and appropriate enquiries in view of the facts and circumstances as discussed in his order dt. 11th February, 1988. Since all the 12 letters sent to the shareholders taken at random by the AO were received back either unserved or there was no response to the query letter issued through registered post, AO was justified in treating the investment made in share capital as income of the assessee from undisclosed sources under s. 68 and CIT(A) was not justified at all in deleting the addition made by the AO while relying upon the order of the Tribunal in the case of Standard Cylinders (P) Ltd. vs. ITO (supra) as the said case stood overruled by jurisdictional High Court of Delhi in the case of CIT vs. Sophia Finance Ltd. (1994) 205 ITR 98 (Del)(FB).
The order of CIT(A) is neither proper nor legal. Since onus to prove the investment is on the assessee which he has failed to prove, therefore, AO 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 Tribunal in the case of Standard Cylinders (P) Ltd. (supra) is not proper as the said decision stands overruled by jurisdictional High Court in the case of CIT vs. Sophia Finance Ltd. (supra). It was urged for restoration of order of AO 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. vs. Asst. CIT [IT Appeal No. 242 (Del) of 1989] decided in August, 1994 whereby addition made under 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 under s. 68 of the IT 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 AO at the time of making original assessment and necessary copies of documents as demanded were also filed and after having been satisfied with the documentary evidence filed for the investment in share application money was accepted and CIT was not justified at all in setting aside the said order under s. 263 or to direct the AO to make proper and appropriate enquiries. It was submitted that neither the action of CIT in invoking s. 263 was proper nor action of AO pursuant to said order of CIT under s. 263 was justified because copy of list of shareholders was duly submitted along with letter of the assessee, dt. 7th February, 1989. It was also submitted that at the time of original assessment detail of 52 shareholders out of public issue as selected by the then AO was submitted along with their confirmations. Photocopies of letters of allotment, list of shareholders running in 100 pages were submitted which contain correct and proper details. Moreover payments were received by the assessee through account payee cheques. It cannot be said that it is a case of not making enquiry by the ITO at the time of making original assessment but since assessment was simply set aside to make enquiries and details were already there on record, assessee thought it not proper to further agitate the setting aside of the assessment order by CIT as assessee was not reluctant or hesitant in cooperating with the Department or in filing the fresh documents which AO could have required. While responding to queries made at the time of original assessment, letter dt. 25th March, 1985, gives further details and there was no occasion for the AO to reject the claim of the assessee as full details were furnished at the time of original assessment. While relying upon 99 ITR 244 (sic), Mather & Platt (India) Ltd. vs. CIT (1987) 168 ITR 493 (Cal), 164 ITR 597 (sic), Meera Engg. & Commercial Co. (P) Ltd. vs. Asstt CIT (1997) 58 TTJ (Jab) 527, Rishi Electronics Ltd. vs. Asstt. CIT (1995) 53 ITD 10 (Del) and while differentiating Sophiya Finance case (supra) from the facts of the case of the assessee, it was pleaded for confirmation of order of CIT(A) which has been passed by properly appreciating the facts and circumstances. It was also submitted that the letter, dt. 7th February, 1989, placed in paper book at p. 25, makes references of confirmations filed on 17th September, 1985. There was no occasion for the AO to have made the addition under s. 68. Moreover, 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 under 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 AO 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 Departmental Representative 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 AO was justified in treating the investment in share capital as income of the assessee from undisclosed sources. Reliance was placed on CIT vs. United Commercial & Industrial Co. (P) Ltd. (1991) 187 ITR 596 (Cal) and it was urged for restoration of order of AO. It was also submitted that assessee is challenging the action of CIT in setting aside the order of original assessment while invoking s. 263 whereas assessee has not preferred any appeal against such order. So in a way finding of CIT, has become final that proper enquiries have not been made and in view of reasoning and basis as given by AO in order pursuant to s. 263, same is a proper order and requires to be restored.
10. We have heard rival submissions, perused the record, gone through the orders of authorities below and the case law as cited by both parties. We have also gone through the documents to which our attention was drawn by the parties. From the documentary evidence as placed by the assessee it makes is amply clear that necessary details were furnished by the assessee at the time of the original assessment as well as in the course of proceedings initiated after setting aside of original order of assessment by CIT under s. 263 and merely if questionnaire/letter sent by registered post acknowledgment due to 12 parties and not to numbering about 600 persons, returned unserved or where service was made, no reply was received, cannot lead to the conclusion that the parties who have subscribed for purchase of shares are not genuine parties, when in all there were 600 shareholders and only 12 were picked up by AO on randam basis to test the genuineness of all the 600 and in view of facts and circumstances, ratio of decision as reported in CIT vs. Sophia Finance Ltd.'s case (supra) also found to be not applicable. It is undisputed fact that money for shares were received through account payee cheques and amounts were received by the bank directly. No material or evidence has been produced by the AO to prove that the amounts invested in purchase of shares has been invested by the assessee-company. Since this a case of company which is registered and incorporated under the Companies Act, 1956 and company has provided list of shares subscribed as stood in its register of shareholders as on 31st December, 1983 along with detailed account from bank for the receipt of such payment. Further the assessee has filed the photocopies of share applications through which money was received by the company in letter dt. 7th February, 1989 in assessment proceedings initiated consequent upon order passed by CIT under s. 263 and giving details of share capital of the company, giving description, number of shareholders, amount, etc. and further submitted that confirmation from shareholders categories 1, 2, 3A were filed by the assessee vide letter dt. 16th March, 1985 and further submitted that assessee had also filed 52 confirmations selected by the IT Department from the shareholders under category 3B on 17th September, 1985 and requested the AO 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 AO. 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 AO 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.
12. I have carefully gone through the order proposed by the learned Judicial Member but I have not been able to persuade myself to concur with the conclusion reached in upholding the order of the CIT(A) deleting the addition of Rs. 24,80,000. I would appraise the relevant facts for proper appreciation of the issue involved.
13. Briefly stated, the assessee-company was incorporated on 23rd October, 1982 as per certificate issued by the Registrar of Companies.
A certificate for commencement of business was obtained from 9th December, 1982. It is a financing company. The assessment year involved is 1984-85 for which the accounting period ended on 31st March, 1983.
The assessee filed a return for the current assessment year on 6th May, 1984, showing a loss of Rs. 31,361. The return filed was accompanied by audited account comprising of P&L a/c, balance sheet, etc. The paid up capital of the company has been shown at Rs. 24,80,000. The AO obtained necessary details of shares out of which shares of Rs. 9,73,000 were allotted under promoters quota. According to the AO, the shareholders in this category were income-tax assessees and their confirmations were filed. The balance share capital of Rs. 13,07,000 was raised under the public issue through the stock exchange out of which shares of Rs. 1,63,000 are held by seven shareholders who were also existing assessees and their confirmations have been filed. For the balance, confirmations are said to have been obtained on at random basis from certain shareholders either through the assessee or writing directly to shareholders. With such observations the AO accepted the share capital as genuine and the assessment was completed at a net loss of Rs. 29,898 on 28th February, 1986 under s. 143(3).
14. The CIT, New Delhi on examination of the records found that no worthwhile enquiry was made by the AO about the genuineness of the shareholders and the actual amount subscribed by them. He, therefore, treated the assessment made as erroneous and also prejudicial to the interest of Revenue and accordingly set aside the assessment with the direction to the AO to the effect that the assessment be reframed after making proper and appropriate enquiries with the following observations : "The assessment framed by the ITO is to be seen in the context of the device adopted by a large number of investment companies in Delhi of 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 shareholders. 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 by the assessee-company through the device of promoters quota and public issue. This enquiry was relevant both from the point of view of finding out whether the moneys introduced in the company were properly explained and also to ascertain true status of the company, namely, as to whether it was in actuality a public limited company or not, the ITO before making the assessment has to satisfy himself about the status of the company. It is obvious from the records of the ITO that no such enquiry was made by the ITO to find out as to whether the so-called shareholders were actually in existence or not. Apart from the status of the company the enquiry in regard to the shareholders and their source of income was required to be done to ascertain : '(a) whether the money introduced in the books of account of the company through share subscription money belonged to the so-called share subscribers; It is no doubt true that the company is 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 creditworthiness 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 introducing unaccounted money in the books of account of the company. In such a case it is the duty of the ITO to pierce the corporate veil and to bring to tax such unaccounted money without taking into account the fine or artificial distinction of separate corporate existence vis-a-vis the shareholders. In any case when any money is introduced in the books of the company either by way of loan or by way of share application money, s. 68 will come into play as per provisions of s. 68 where any sum is found credited in the books of the company maintained for any previous year and the assessee offers no explanation about the nature and source of the explanation offered by him is not satisfactory, the sum so credited is liable to be charged to income-tax as the income of the assessee of that previous year. The sums alleged to have been received from the shareholders are credited in the books of account of the company. In such circumstances the ITO was duty bound to enquire into the source of the sums so credited. Sec. 68 of the IT 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 Gee Vee Enterprises (P) Ltd. vs. Addl. CIT & Ors. (1975) 99 ITR 375 (Del), such non-enquiry made the assessment erroneous and also prejudicial to the interest of Revenue.
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." 15 The assessee has not challenged the order of the CIT passed under s.
263 before the Tribunal and the same has thus become final.
16. The AO in consequence to the direction given by the CIT in the order under s. 263 took up the reassessment proceedings. He noted that the position of the capital subscribed is as under : 1. Subscribers 300 7,000 2. Promoter's quota 16,300 9,73,000 3. Public issue : (a) Over 500 shares 16,300 1,63,000 (b) Below 500shares - 13,37,000 ----------- 24,80,000 ----------- 17. The AO issued notices under ss. 143(2) and 142(1) but the terms of such notices were not complied. Meanwhile the AO made enquiries from 12 shareholders taken up at random by writing them directly. The notices issued were received back unserved in the case of eight shareholders; three did not reply and one sought extension of time for reply. The result of such enquiry was brought to the notice of the assessee and required the assessee to show cause why the entire shareholding should not be considered as not genuine and the paid up share capital of Rs. 24,80,000 be not treated as income from undisclosed sources. The assessee in spite of various opportunities given, failed to comply with the terms of the notice satisfactorily. The AO, therefore, decided the matter on merits on the basis of the material available on records. The AO considered the modus operandi adopted as pointed out by the CIT in his order under s. 263. There was a sum of Rs. 24,80,000 credited in the account of the assessee-company and the onus was on the assessee as per provision of s. 68 of the IT Act to prove the genuineness of the shareholding. He, therefore, placing reliance on the decisions in P. V.Raghava vs. CIT (1956) 29 ITR 942 (AP), Orient Trading Co. Ltd. vs. CIT (1963) 49 ITR 723 (Bom), Shankar Industries vs. CIT (1978) 114 ITR 689 (Cal) and McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) 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 s. 68 of the IT Act for the current year.
18. On appeal it was contended that the act of the AO 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 its order in the case of Standard Cylinders (P) Ltd. vs. ITO (1988) 24 ITD 504 (Del) for the asst. yr. 1980-81 wherein it was held that the AO was not competent to enquire about the source of investment by shareholders while making assessment of accounts. Moreover, the law does not entitle the AO to insist upon the company to prove not only the source but also source of source and since finding given is not in conflict with the provisions of s. 68 the CIT(A) deleted the addition made with the following observations : "I have gone through the facts as well as the order of the Tribunal Delhi in the case of M/s Standard Cylinders (P) Ltd., I find that the appellant has tried to give as many details as was practically possible for him to file before the AO. Keeping in view the finding of the Tribunal in the above quoted case that the source of source cannot be looked into by the AO. It is quite clear that in case of an unexplained investment made by the shareholders, the matter can be inquired into only in the case of the individual shareholder and not in the case of the company. Respectfully following the same, I hold that the AO was not justified in making the disallowance of the amount of Rs. 24,80,000 as unexplained income of the appellant company from other sources. The addition so made, is hereby deleted." 19. The learned Departmental Representative made a submission that the share capital amount of Rs. 24,80,000 was found credited in the books of account of the assessee-company and as per provisions of s. 68, the AO was within his powers to enquire about the identity of the shareholders their capacity to invest and genuineness of the transactions and the onus cast upon the assessee-company in this behalf has not been discharged to the satisfaction of the AO.20. He further submitted that the original order of assessment accepting the share capital of Rs. 24,80,000 was found erroneous insofar as prejudicial to the interest of the Revenue by the CIT on examination of the records and the assessment made was accordingly set aside to be made de novo after making due enquiries as per directions given by order under s. 263. This order of the CIT has been accepted by the assessee-company and has not gone in appeal before the Tribunal against this order. This has thus become final. He has further 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. (supra) and therein a view similar to that taken by the Delhi High Court in the case of CIT vs. Stellar Investment Ltd. (1991) 192 ITR 287 (Del) has been taken.
The learned Departmental Representative 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 CIT vs. Sophia Finance Ltd. (1994) 205 ITR 98 (Del)(FB) wherein the Hon'ble High Court has taken the following view : "The ITO 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 ITO 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' in s. 68 clearly indicates that the ITO would then have the jurisdiction, if the facts so warrant, to treat such a credit to be the income of the assessee.
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 and to that extent the observations in the case of CIT vs. Stellar Investment Ltd. (1991) 192 ITR 287 (Del), are correct but if, on the other hand, the assessee offers no explanation at all or the explanation offered is not satisfactory then, the provisions of s.
68 may be invoked. In the latter case s. 68, being a substantive section, empowers the ITO to treat such a sum as income of the assessee which is liable to be taxed in the previous year in which the entry is made in the books of account of the assessee." 21. The learned Departmental Representative has also filed a copy of Tribunal's order in the case of Shree Shyam Tubes (P) Ltd. [IT Appeal No. 242 Delhi of 1989] for the asst. yr. 1983-84 wherein for want of proof the share capital shown in the books was treated as income of the assessee as per provisions of s. 68 of the IT Act placing reliance upon the decision of the Hon'ble Delhi High Court in the case of Sophia Finance Ltd. (supra). The learned Departmental Representative, therefore, pleaded that the order of the CIT(A) being not in consonance with the ratio of the decision of the Hon'ble Delhi High Court in the case of Sophia Finance Ltd. (supra) deserves to be vacated and that of the AO restored.
22. The learned counsel of the assessee has made a submission that the assessee-company raised public issue for allotment of shares and in response the investors made application for allotment of shares and the share application money was received through the bank. The assessee-company furnished necessary details of shareholders as per the shareholder register maintained along with their complete address and also filed confirmations of the shareholders of the category of promoters and others at random as required by the AO. The assessee-company received the payment of share application money from the bank acting as agent of the shareholders and the same has been duly accounted for in its books. Most of the shareholders from the promoters quota are existing assessees and they have given their GIR/PAN numbers with confirmations filed. The assessee-company thus furnished all necessary evidence to prove the genuineness of the shareholders. Thus the onus cast upon the assessee stands fully discharged and under the circumstances the AO 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 s. 68 of the IT Act. In support he placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT vs. Orissa Corpn. (P) Ltd. (1986) 159 ITR 78 (SC) 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. CIT vs. Bahri Bros. (P) Ltd. (1985) 154 ITR 244 (Pat); and Mather & Platt (India) Ltd. vs. CIT (1987) 168 ITR 493 (Cal) 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 the Tribunal's decision in the case of Meera Engg. & Commercial Co. (P) Ltd. vs. Asst. CIT (1997) 58 TTJ (Jab) 527 wherein all the 51 shareholders filed their affidavits and confirmatory letters and 24 of them filed replies also to notices issued under s. 143(6) and names of the shareholders given. It was held that the assessee-company had discharged its onus about establishing the identity of shareholders and the assessee was not required to prove the creditworthiness of the shareholders. The addition made under s. 68 was deleted. The learned counsel has also referred to the Tribunal's decision in the case of Rishi Electronics Ltd. vs. Asstt. CIT (1995) 53 ITD 10 (Del). In this case the names of the shareholders and amount subscribed were furnished. Before the end of the previous year the shares were found sold and transferred to members of certain families who were existing shareholders and had substantial interest in the assessee-company. The assessee was able to produce only one shareholder. The notices sent by the AO to other subscribers were returned undelivered by the postal authorities. The AO treated the entire amount of Rs. 10 lacs representing the value of preferential shares as income of the assessee under s. 68 of the IT Act. The assessee-company was not required to produce the bank records of the shareholders for verification. This could be collected by AO otherwise. The matter was remanded to the AO for fresh consideration.
23. The learned counsel has, therefore, pleaded that looking to the facts and circumstances discussed and ratio of the decisions cited, the onus cast upon the assessee-company to establish the identity of the shareholders has been fully discharged as per the ratio of the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sophia Finance Ltd. (supra) and the CIT(A) was fully justified in deleting the addition.
24. I have considered all relevant facts, material brought on records and rival submissions made. I have also perused the various documents placed in the paper book of the assessee-company to which attention of Bench was drawn during the course of hearing and also the various decisions cited. I find from the details given that 97,300 shares were allotted to promoters; 300 to subscribers and the remaining 1,50,000 were allotted to shareholders on public issue. The total paid up capital was of Rs. 24,80,000. In the original assessment order the AO has mentioned that shareholders of promoters category are all income-tax assessees and their confirmation have been filed. Details of such shareholders are placed at pp. 113 to 115 of the paper-book and their confirmations are at pp. 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 pp.
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 pp. 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 through cheque but there is no independent evidence produced to show that such payments were through account payee cheques or bearer cheques and the details filed also does not give the number of individual cheques. The details filed, however, give their address-number of shares allotted and amount of share money. It would thus be seen from the details given that the assessee-company has filed confirmations as per its claim of 85 shareholders (7 subscribers, 19 promoters, 7 having shares of above 1,000 and 52 others). The assessee-company has thus not filed any confirmation from 485 shareholders having shares below 1,000 on public issue.
25. The AO during the course of the reassessment proceedings sought direct confirmation from 12 shareholders, selected at random having shares below 1,000 and notices issued to eight shareholders were received back unserved from postal authorities and no reply was received from three of them and one sought extension. The result of such enquiries was confronted to the assessee and based on the result of such enquiries the AO required the assessee to show cause why the paid up capital amount of Rs. 24,80,000 be not treated as deemed income. The assessee-company in response failed to produce any further evidence to establish the identity of any of the shareholders.
26. The CIT(A) has deleted the addition made of Rs. 24,80,000 deemed income under s. 68 of IT Act placing reliance on the Tribunal's decision in the case of Standard Cylinders (P) Ltd. vs. ITO (supra).
27. In the case of Standard Cylinders (P) Ltd. vs. ITO (supra), assessment was completed for the asst. yr. 1980-81. The CIT initiated proceedings under s. 263 and held that the assessment made erroneous and prejudicial to the interest of Revenue as the AO failed to make any enquiry from the registered shareholders about the source of investment made by them in shares. The Tribunal set aside the order of the CIT passed under s. 263 with the following observations : "The onus regarding funds credited in its books got fully discharged if those funds represented funds for investment made in its shares.
The shareholders whose names were duly registered in the register after having made the investment, could not deny that they had not subscribed to the share standing in their names and if they could not deny, it was for 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 s. 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." 28. The Hon'ble Delhi High Court in its Full Bench judgment in the case of CIT vs. Sophia Finance Ltd. (supra) has, however, held the view that the AO is entitled and it would indeed be his duty to enquire whether the shareholders do in fact exist and in case the AO 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 non-existing persons and the AO would then have jurisdiction if the facts so warrant to treat the credit amount as deemed income of the assessee-company under s. 68 of the IT Act whereas the view taken by the Tribunal in the case of Standard Cylinders (P) Ltd. vs. ITO (supra) is that provisions of s. 68 do not apply to the share capital introduced and the AO has no authority to go into the genuineness of such share capital. The Tribunal's decision is, therefore, totally at variance with the ratio laid down by the Full Bench of the jurisdictional Delhi High Court and accordingly it stands overruled. The Tribunal's decision in the case of Standard Cylinders (P) Ltd. vs. ITO (supra) relied upon by the CIT(A) in deleting the addition made is no longer a good precedent to be relied upon and accordingly the appellate order deserves to be vacated applying the ratio of the Full Bench decision of the Hon'ble Delhi High Court in the case of CIT vs. Sophia Finance Ltd. (supra). The question that now arises for consideration is whether the assessee-company has discharged the onus cast upon it to establish the identity of the shareholders within the meaning of the ratio laid down by the Hon'ble Delhi High Court. It has been settled by the Hon'ble Delhi High Court that s. 68 of the IT Act applies to the credit shown in the books on account of share capital amount and the onus to prove and establish the identity of the shareholders lies upon the assessee-company. The AO during the course of reassessment proceedings considered the genuineness of the credit in the books of the assessee-company and on the independent enquiries made by way of seeking confirmation under s. 133(6) of the IT Act from 12 shareholders selected at random found that notices sent to 8 shareholders at the address given through registered A.D. came back unserved. The AO confronted the assessee-company with the result of the enquiries so made from 12 shareholders and intended to treat whole of share capital amount of Rs. 24,80,000 as deemed income of the assessee-company under s. 68 of the IT Act. The assessee-company made no efforts to prove and establish the identity of majority of the shareholders apart from whom confirmation had been filed during the course of original proceedings, though sufficient opportunity was afforded. The assessee-company rather in its letter dt. 25th January, 1985 addressed to the AO 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 AO 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 AO. The AO 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 AO wrote to only 12 shareholders selected at random for seeking information or the confirmation as per provisions of s. 133(6) of the IT Act, but he had made no efforts to make similar enquiries about other shareholders. 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 AO 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 AO for fresh adjudication. I, accordingly, vacate the appellate order as well as the assessment order and restore the matter to the file of the AO for fresh adjudication. The AO is directed to deal with the issue in light of the ratio of the decision of the Hon'ble jurisdictional Delhi High Court in the case of CIT vs.
Sophia Finance Ltd. (supra) and to decide the issue afresh on merits in accordance with law after affording sufficient opportunity of being heard to the assessee-company.
29. In the result, the Departmental appeal is treated to be allowed for statistical purposes.
30. Since in the above captioned appeal we have difference of opinion on the following point, the matter is submitted to the Hon'ble President for reference to the Third Member : "Whether, on the facts and in the circumstances of the case, the order of learned CIT(A) should be upheld or it should be set aside and restored on the file of the AO to be made de novo ?" 31. Since in the above captioned appeal we have difference of opinion on the following point, the matter is submitted to the Hon'ble President for reference to the Third Member : "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 (P) Ltd. vs. ITO (1988) 24 ITD 504 (Del) be upheld as proposed by the Judicial Member or the matter be restored to the AO for readjudication in light of Jurisdictional High Court decision in the case of Sophia Finance Co. as viewed by the Accountant Member." 32. There was a difference of opinion between 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 learned Judicial Member, the following is the point of difference of opinion : "Whether, on the facts and 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 AO to be made de novo ?" 33. 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 (P) Ltd. vs. ITO (1988) 24 ITD 504 (Del) be upheld as proposed by the Judicial Member or the matter be restored to the AO for readjudication in light of jurisdictional High Court decision in the case of CIT vs. Sophia Finance Co. (1994) 205 ITR 98 (Del)(FB) as viewed by the Accountant Member ?" 34. Consequent to the disagreement between my learned colleagues, the Hon'ble President of the Tribunal, in exercise of power conferred to him by s. 255(4) of the IT Act, 1961 (hereinafter referred to as 'the Act') has referred the matter to me to express my opinion as a Third Member.
35. The facts of the case have been extensively mentioned in the orders of the AO, CIT(A), learned Judicial Member and Accountant Member and hence need no repetition in detail. However, to give a background of the factual position, the undisputed facts are briefly set out in the succeeding paragraphs.
36. The assessee an investment company, was incorporated on 23rd October, 1982. Certificate for commencement of business was granted on 9th December, 1992. The previous year relevant to the assessment year under consideration ended on 31st December, 1983. The paid up capital of the company was Rs. 24,80,000, the break-up of which was as under : (1) Initial subscribers 700 7,000 (2) Promoters quota 97,300 9,73,000 (3) Public issue : (a) Over 500 shares 16,300 1,63,000 (b) Below 500shares 1,33,700 13,37,000 ---------- Total 24,80,000 ---------- 37. The assessee had filed its return on 6th May, 1984 declaring a loss of Rs. 31,361. The assessment was completed vide order under s. 143(3) of the Act dt. 28th February, 1986, on a net loss of Rs. 29,898. The enquiries made before completing this assessment, as mentioned in para 2 of the order of learned Accountant Member, were on the following lines : "The AO obtained necessary details of shares out of which shares of Rs. 9,73,000 were allotted under promoters quota. According to the AO the shareholders in this category were income-tax assessees and their confirmations were filed. The balance share capital of Rs. 13,07,000 was raised under the public issue through the stock exchange out of which shares of Rs. 1,63,000 are held by seven shareholders who were also existing assessees and their confirmations have been filed. For the balance, confirmations are said to have been obtained on at random basis from certain shareholders either through the assessee or writing directly to shareholders. With such observations the AO accepted the share capital as genuine and the assessment was completed at a net loss of Rs. 29,898 on 28th February, 1986 under s. 143(3)." 38. The learned CIT, Delhi-III, New Delhi, however, set aside this assessment vide order under s. 263, dt. 11th February, 1988. The relevant portion from his order has been reproduced in para 2.1 of the order of the learned Accountant Member. It would be appropriate to extract below the portion of the order of the learned 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 creditworthiness 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 introducing unaccounted money in the books of account of the company. In such a case it is the duty of the ITO to pierce the corporate veil and to bring to tax such unaccounted money without taking into account the fine or artificial distinction of separate corporate existence vis-a-vis the shareholders. In any case when any money is introduced in the books of company either by way of loan or by way of share application money, s. 68 will come into play as per provision of s. 68 where any sum is found credited in the books of the company maintained for any previous year and the assessee offers no explanation about the nature and source of the explanation offered by him is not satisfactory, the sum so credited is liable to be charged to income-tax as the income of the assessee of that previous year. The sums alleged to have been received from the shareholders are creditors in the books of account of the company.
In such circumstances the ITO was duly bound to equire into the source of the sums so credited. Sec. 68 of the IT 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 were made in this regard. The ITO having not conducted these enquiries failed in this 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 (P) Ltd. vs. Addl. CIT & Ors. (1975) 99 ITR 375 (Del), such non-enquiry made the assessment erroneous and also prejudicial to the interest of Revenue." 39. The assessee-company did not file any appeal against the aforesaid order under s. 263 and hence it became final.
40. The AO made the reassessment on 16th January, 1990 assessing the entries share capital of Rs. 24,80,000 as "Business income : Income from other sources", for the following reasons : (i) He picked up 12 persons at random from amongst those of the public who is all held 3,100 shares out of a total of 2,48,000 shares. Letters were issued directly to these shareholders. The letters were returned unserved in 8 cases and in the remaining 4, where these were served, no replies were received.
(ii) The following show-cause notice was issued by the AO to the company : "These letters were sent by registered post acknowledgment 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 s. 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 unexplained 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 AO 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 s. 68 of the IT Act. By referring to certain judicial decisions on this aspect, including the decision of the apex Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC), the AO held that the entire amount of the share capital of Rs. 24,80,000 remained unexplained within the terms of s. 68 and was liable to be assessed as assessee's income.
41. In appeal, the learned CIT(A) observed that "the appellant has tried to give as many details as was practically possible for him to file before the AO". Keeping in view this fact and the decision of the Tribunal Delhi Bench in the case of Standard Cylinders (P) Ltd. vs. ITO (1988) 24 ITD 504 (Del) to the effect that the source of source cannot be looked into by the AO, she decided the appeal in favour of the assessee.
42. After considering the submissions made on behalf of the assessee, the learned Judicial Member has concluded as under : "Therefore, in view of the facts and circumstances and decided cases on the point, we are of the view that the action of the CIT(A) in holding that AO 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." 43. The learned Judicial Member has upheld the order of the learned CIT(A), inter alia, on the following grounds : (i) The documentary evidence as placed by the assessee makes it amply clear that necessary details were furnished by the assessee at the time of original assessment as well as in the course of proceedings initiated after the setting aside of the original order of the assessment by the learned CIT under s. 263. According to him, merely if questionnaire/letter sent by registered post to 12 parties and not to numbering about 600 persons, was returned unserved or where service was made, no reply was received, it cannot lead to the conclusion that the parties who have subscribed for purchase of shares are not genuine parties, when in all there were 600 shareholders and only 12 were picked up by the AO on random basis to test the genuineness of all the 600. In view of the facts and circumstances, ratio of the decision of the Jurisdictional High Court in the case of CIT vs. Sophia Finance Ltd. (1994) 205 ITR 98 (Del) was found to be not applicable.
(ii) This is a case of a company which has provided list of shares subscribed as appearing in its register of shareholders as on 31st December, 1983 along with detailed account from bank for the receipt of such payment.
(iii) Under its letter dt. 7th February, 1989, the assessee-company had filed the photo 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 s. 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, dt. 16th March, 1985. On 17th September, 1985, it had further submitted 52 confirmations in respect of shareholders under category 3B selected by the IT 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.
"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 AO 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 AO for fresh adjudication. I, accordingly, vacate the appellate order as well as the assessment order and restore the matter to the file of the AO for fresh adjudication. The AO is directed to deal with the issue in light of the ratio of the decision of the Hon'ble jurisdictional Delhi High Court in the case of CIT vs. Sophia Finance Co. Ltd. (1994) 205 ITR 98 (Del) and to decide the issue afresh on merits in accordance with law after affording sufficient opportunity of being heard to the assessee-company." 45. The learned Accountant Member has set aside the order of the learned CIT(A) mainly for the following reasons : (i) The CIT(A) has deleted the addition of Rs. 24,80,000 made under s. 68 of the Act by placing reliance on the Tribunal's decision in the case of Standard Cylinders (P) Ltd. vs. ITO (supra) holding that the provisions of s. 68 do not apply to share capital introduced and the AO had no authority to go into the genuineness of such capital.
However, the Jurisdictional High Court in its Full Bench decision in the case of CIT vs. Sophia Finance Ltd. (supra) has held that s. 68 of the IT Act applies to the credit shown in the books of accounts in share capital account, the AO is entitled to enquire whether the shareholders do, in fact, exist and that the onus to prove and establish the identity of the shareholders lies on the assessee. The Tribunal's decision in Standard Cylinder Company thus stands overruled by the Jurisdiction High Court and is no longer a good precedent to be relied upon. Therefore, the order of the learned CIT(A) deserves to be vacated.
(ii) Though the assessee-company had filed confirmations of 85 shareholders, it had made no efforts to establish the identity of other shareholders by way of filing their confirmations or producing them before the AO. (iii) The results of direct enquiries made on random basis from 12 shareholders were confronted by the AO to the assessee and it was required to show cause why the paid up capital of amount of Rs. 24,80,000 be not treated as deemed income but in response thereto, the assessee-company made no efforts to prove and establish the identity of majority of the shareholders, apart from whom confirmations had been filed during the course of original proceedings, though sufficient opportunity was afforded.
(iv) The AO had neither made any verification about the confirmations 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 sources.
(v) Only 12 shareholders were selected at random for seeking information or confirmation as per provisions of s. 133(6) of the Act but the AO made no efforts to make similar enquiries about other shareholders.
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 learned Accountant Member, it is quite evident that he has gone by the fact that the order of the learned CIT(A) was based on the Tribunal's decision in the case of Standard Cylinders (P) Ltd. vs. ITO (supra). This may be true but then the learned 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 learned CIT(A) had decided the issue in the light of Tribunal's decision in the case of Standard Cylinders (P) Ltd. vs. ITO (supra), the Tribunal was legally bound to decide the issue in the light of Jurisdictional High Court decision in the case of CIT vs.
Sophia Finance Ltd. (supra), which has, in fact, been referred to by both the learned Members. It is pertinent to point out that the learned Accountant Member has not held that in view of the aforesaid Jurisdictional High Court decision, the order of the learned CIT(A) could be reversed. He has merely vacated the orders of the authorities below and restored the matter to the file of the AO for a fresh decision. On the other hand, the learned Judicial Member has upheld the order of the learned CIT(A). Thus, the controversy revolves round the question whether the order of the learned CIT should be upheld or it should be set aside and the matter restored to the file of the AO for decision afresh. The point of difference made out by the learned Judicial Member is to this effect only. I would, therefore, confine myself to this controversy.
46. Representatives of both the parties argued the matter at length. It is not considered necessary to set out the entire arguments. Suffice it to say that the contention of the learned Departmental Representative was that, as has been pointed out by the learned Accountant Member, the matter has to be decided in the light of Jurisdictional High Court decision in the case of CIT vs. Sophia Finance Ltd. (supra), as per which not only the AO was entitled to enquire into the credits on account of receipt of amounts for issue of shares but indeed it was his duty to do so. The learned Departmental Representative submitted that on the one hand, the assessee had failed to discharge the onus that lay on it to prove the genuineness of the entire credits, on the other hand, the AO also did not make enquiries that were expected to be made by him in the matter. He strongly urged that in the interest of justice, the orders of the CIT(A) and AO deserved to be set aside and the matter restored to the AO for a fresh decision in accordance with law, as was held by the learned Accountant Member.
47. Opposing, the learned counsel for the assessee strongly supported the order of the learned Judicial Member. He drew our attention to the facts mentioned by the learned Judicial Member, which were not in dispute and to the material brought by the assessee on record to discharge its onus for proving the genuineness of the credits for issue of shares. He strenuously argued that the assessee could not be anything further. Relying on the ratio of the apex Court decision in the case of CIT vs. Orissa Corpn. (P) Ltd. (1986) 159 ITR 78 (SC), the learned counsel submitted that in the circumstances of the case, the conclusion arrived at by the learned Judicial Member was neither unreasonable nor perverse nor based on no evidence and hence it should be upheld. The learned 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 AO had failed to make certain enquiries, as is pointed out by the learned Accountant Member, he could not be allowed to make good of the deficiencies of his case. The learned counsel thus supported the order of the learned Judicial Member.
48. 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 learned Members along with material on record to which my attention was invited. In my view, there is no justification for restoring the matter to the file of AO 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 CIT vs. Sophia Finance Ltd. (supra) the Tribunal's decision in the case of Standard Cylinders (P) Ltd. vs. ITO (supra) no longer holds the field but then this decision cannot be said to be laying down a universal rule that where share capital money has been received by a company, it should be treated as company's income, discarding or disregarding the evidence produced by the company, on some predetermined notions as has been done by the AO in this case. The question for consideration in the case of CIT vs.
Sophia Finance Ltd. (supra) was whether under no circumstances could the amount of share capital be regarded as undisclosed income of the company, as was held in the earlier decision in the case of CIT vs.
Stellar Investment Ltd. (1991) 192 ITR 287 (Del). In this background, the Full Bench of the Hon'ble High Court made the following observations at p. 105 : "The ITO 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 ITO 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' in s. 68 clearly indicates that the ITO would then have the jurisdiction, if the facts so warrant, to treat such a credit to be the income of the assessee.
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 and to that extent the observations in the case of CIT vs. Stellar Investment Ltd. (1991) 192 ITR 287 (Del), are correct but if, on the other hand, the assessee offers no explanation at all or the explanation offered is not satisfactory then, the provisions of s.
68 may be invoked. In the latter case s. 68, being a substantive section, empowers the ITO to treat such a sum as income of the assessee which is liable to be taxed in the previous year in which the entry is made in the books of account of the assessee." 49. Thus, the legal provision laid down by the Hon'ble High Court is that once the identity of the shareholders is established and they exist, then no further enquiry has to be made. Hence, it was the AO's duty to satisfy himself whether the shareholders existed or not. The material placed by the assessee suo motu or brought by the AO 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 learned Accountant Member's order in para 4.3 above, shares worth Rs. 9,73,000 were allotted under promoters quota and the AO 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 AO 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 CIT vs. Sophia Finance Ltd. case (supra).
During the course of reassessment proceedings, the AO had not communicated anything to the assessee-company as to why he was going back from his either findings. Letters were not issued to all the shareholders falling in the public category. All that the AO has stated in para. 5 of the order is that : "On 25th January, 1989, Shri K. R. Agarwal, CA/AR attended and on point of share on loss he wanted time upto 20th February. In the meanwhile, the case was to be discussed on 6th February, 1989 regarding promoters quota and public issue. (See order sheet entry dt. 31st January, 1989 to p. 7). On 7th February,1989 Shri K. R. Agarwal attended and filed one letter and the case was discussed partly and the discussion was continued on 13th February, 1989." It is not clear what was intended to be discussed regarding the promoters contribution when their existence already stood established.
(b) Regarding the shares issued to the public, the AO was at liberty to make enquiries in regard to all such shareholders but he preferred to issue letters to only 12 persons, out of which letters could not be served in respect of 8 persons. Therefore, at best, what could be said is that existence of these 8 persons could not be established in terms of the decision of CIT vs. Sophia Finance Ltd.'s case (supra). The entire share capital could not in any case be added.
(c) The learned Accountant Member has opined that the assessee-company made no attempt to prove and establish the identity of the majority of the shareholders, apart from whom confirmation has been filed during the course of original proceedings, though sufficient opportunity was afforded. On this observation, with utmost respect, it needs to be said that the general rule is that the apparent is to be taken as the real state of affairs unless contrary is proved. Hence when an assessee-company represents that it has issued shares on receipt of share applications with funds directly credited in the bank account, the burden of proving that the shareholders did not exist would fall on Department. As is mentioned above, the assessee had proved the existence of shareholders holding shares of value of Rs. 11,36,000. As regards the remaining shareholders, enquiries were made by the AO only in respect of 12. Hence, the occasion to prove the existence of the others never arose. In fact, the assessee-company was not asked to establish their existence and, therefore, the charge that the assessee-company made no attempt to prove and establish the identity of the major shareholders is neither correct nor justified.
(d) Similarly, there is again no force in the learned Accountant Member's observation 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 their confirmations or producing them before the AO. It was not obliged to do so suo motu and it was not asked to do so by the AO, who chose to enquire about 12 shareholders only.
(e) The observation of the learned Accountant Member that the AO 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 AO's failure to do his job properly, when he had full opportunity to do so, he cannot be given a third innings 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 s. 133(6) of the Act and the AO made no efforts to make similar enquiries about other shareholders cannot be a ground for restoring the matter to the AO because nothing prevented the AO from enlarging his area of enquiries.
The powers of the Tribunal in the matter of setting aside an assessment are large and wide, but these cannot be exercised to allow the AO an opportunity to patch up the weak part of his case and to fill up the omission. In my opinion, a party guilty of remissness and gross negligence is not entitled to indulgence being shown. In this context, I would like to make a reference to a decision of the Chennai Bench of the Tribunal in the case of Tatia Skyline & Health Farms Ltd. vs.
Asstt. CIT (2000) 66 TTJ (Chennai) 203 : (1999) 70 ITD 387 (Chennai).
In this decision, on the assessee's request that the case be sent back to the AO for another round of enquiry and fresh assessment in accordance with law. the Bench, rejecting the assessee's request has held that the remand order should be made in very rare and exceptional case, for example, if at original stage, patently grave error was committed by the original authority or that the order was made in haste owning to the limitation or that the first appellate authority had violated the rules of natural justice. Nothing like this has happened on the present case. The Bench has further observed that the Courts have also cautioned the Appellate Authorities by holding that remand should be made only in those cases where the original authorities have not passed orders in accordance with law but in no case, remand should be made only in those cases where the original authorities have not passed orders in accordance with law but in no case, remand should be made to enable an assessee to fill in the blanks or lacuna in the case which remains present. What applies to the assessee, would equally apply to the AO. Likewise, in the case of Smt. Neena Syal vs. Asstt.
CIT (1999) 70 ITD 62 (Chd.), the Chandigarh Bench of the Tribunal has observed that it is not the function of the Tribunal to allow further opportunity to the AO to cover up legal lapses made by him, by restoring the matter back to his file. Therefore, remand/setting aside order could not be made in this case to enable the AO to make up his earlier deficient work by initiating assessment proceedings for the third time after a lapse of considerable time.
In view of the foregoing discussion, I find myself unable to agree with the order of the learned Accountant Member to restore the matter to the file of the AO. Therefore, I agree with the view expressed by the learned Judicial Member.
The matter will now go before the regular bench for decision according to the majority opinion.