FORM NO.(J2) IN THE HIGH COURT AT CALCUTTA SPECIAL JURISDICTION (INCOME TAX) ORIGINAL SIDE Present: Hon’ble Justice Girish Chandra Gupta And Hon'ble Justice Asha Arora GA NO.509 OF2016WITH ITAT NO.113 OF2016RAJMANDIR ESTATES PRIVATE LIMITED.
Versus PRINCIPAL COMMISSIONER OF INCOME TAX, KOLKATA – III, KOLAKTA.
Advocate for the Appellant: Mr.N.K.
Poddar, Sr.Adv.Mr.Vineet Tibrewal, Adv.Advocate for the Respondent: Mr.A.K.
Ghosal, Sr.Adv.Mr.P.Dudhoria, Adv.Date of Hearing: 15.03.2016, 16.03.2016, 17.03.2016, 18.03.2016, 21.03.2016, 22.03.2016, 24.03.2016, 29.03.2016, 31.03.2016, 01.04.2016, 04.04.2016, 05.04.2016.
Judgement delivered on:13th May 2016.
GIRISH CHANDRA GUPTA, J.
The appeal is directed against a judgement and order dated 3rd November, 2015 passed by the learned Income Tax Appellate Tribunal, Kolkata, ‘D’ – Bench in ITA No.882/KOL/2013 pertaining to the assessment year 2009-10 upholding an order dated 22nd March, 2013 passed under Section 263 of the Income Tax Act, 1961.
The assessee has come up in appeal.
Briefly stated the facts and circumstances of the case are as follows:The share capital of the assessee as at 31st March, 2008 was Rs.55,15,000/-.
During the relevant previous year share capital of the assessee rose to a sum of Rs.1,34,42,370/-.
The reserve and surplus which as at 31st March, 2008 was a sum of Rs.77,398.31 paise rose to a sum of Rs.39,92,61,247.60 paise.
The increase in the share capital and the reserve and surplus is consequent to the issuance of 7,92,737 shares of Rs.10/- each at a premium of Rs.390/-.
The authorised share capital of the assessee during the relevant assessment year was Rs.1,36,00,000/-.
The assessee originally filed a return showing a gross total income of Rs.24,658/-.
The assessee thereafter wrote to the assessing officer that due to inadvertence it had not disclosed receipt of a sum of Rs.61,000/- on account of consultancy fees.
The mistake, it was pointed out, was due to the fact that the sum of Rs.61,000/- had been spent in making donation to a club.
In the circumstances a notice dated 15th February, 2011 under Section 148 was issued.
A notice dated 23rd February, 2011 under Section 142(1) of the Income Tax Act was also issued, seeking amongst other the details of share application money received by the assessee, including the names of the applicants, their address, date of receipt and the total amount received.
It was submitted by Mr.Poddar that consequent to the notice dated 23rd February, 2011 the assessee disclosed full particulars as regards the applicants of shares including the money received from them.
The aforesaid increase in the share capital is stated to have been subscribed by 39 corporate applicants.
15 out of them were issued notices under Section 133(6) of the Income Tax Act.
Those 15 applicants were directed amongst others to disclose the source of money contributed to the share capital of the assessee.
Mr.Poddar contended that though the notices under Section 133(6) were issued to only 15 out of 39 applicants of share, the source of money in respect of each of the applicants of shares including their confirmation and bank statements were disclosed by the assessee.
From the information made available by the assessee, it appears that 19 out of 39 applicants secured funds, for the purpose of contributing to the share capital of the assessee, on account of share application money.
In other words, those 19 applicants collected funds on account of share application money in their respective companies and that money was contributed to the share capital of the assessee.
15 out of the 39 applicants, it appeaRs.procured the fund by selling shares.
The balance applicants of shares in the share capital of the assessee company did not however disclose the nature of receipt though source of fund was disclosed.
What has not been specified is, as to on what account was the money received.
The forms of share application purporting to have been signed by the applicant companies have also been disclosed from which it appears that the date of allotment, number of allotment, number of shares allotted, share ledger folio, allotment register folio, application number, have all been kept blank.
These particulaRs.Mr.Poddar, submitted should have been filled up by the assessee, but that has not been done.
Another significant fact admitted by the assessee in reply to the notice to show cause under Section 263 is that the “shares were offered to, and subscribed by the closely held companies owned by the Promoters/Directors or their close relatives and friends”.
Assessment under Section 143(3) read with Section 147 of the Income Tax Act was completed on 30th March, 2011.
A notice dated 22nd February, 2013 was issued under Section 263 of the Income Tax Act alleging that the assessment under Section 143(3) / 147 was completed without application of mind and without requisite enquiry into the increase of the share capital including the premium received by the assessee.
The assessee replied stating, inter alia, as follows:“On a bare perusal of the impugned Showcause Notice, it would appear that the allegations of the Revenue may be summarized as under: (i) That the Assessing Officer did not make requisite enquiry on the issue as to “what prompted the subscribers” to subscribe Shares at a high premium, issued by a closely held company.
(ii) That there is no evidence on record which can show that the issue of subscription of Shares had been examined objectively and, therefore, it appeared to the Revenue that the assessment order was passed without application of mind.
Before proceeding to reply to the aforesaid allegations, which, in our humble view, are wholly unfounded, it would be appropriate to recall the undisputed facts borne out by record, as under: In the previous year relevant to the assessment year 2009-10 the assessee- company had issued 7,92,737 Equity Shares of the Face Value of Rs.10/- each at a premium of Rs.390/-.
Such shares were offered to, and subscribed by the closely held companies owned by the Promoters/Directors or their close relatives and friends.
From the List of Allottees of such Shares (copy given herewith).it would be kindly found that all the Shares were offered to, and subscribed by the corporate entities and therefore, there was no question of any outsider making investment in Shares of the assessee-company.
It bears importance to state here that the investor companies of Shares were interested to subscribe Shares of the assessee-company as, according to them, the assessee-company had great prospect in future.” The CIT in his order dated 22nd March, 2013 passed under Section 263 opined that this was or could be a case of money laundering which went undetected due to lack of requisite enquiry and non-application of mind.
He entertained the belief “that unaccounted money is laundered as clean share capital by creating a façade of paper work, routing the money through several bank accounts and getting it the seal of statutory approval by getting the case reopened u/s.147 suo motu”.
The order dated 30th March, 2011 passed under Section 143(3).147 was thus erroneous and prejudicial to the interest of the revenue.
He, therefore, set aside the same and issued directions for a thorough enquiry.
To be precise the following directions were issued.
“A.O.is directed to carry out through and detailed enquiries in the case.
He should carry out inquiries about the various layers through which the share capital has been rotated.
The A.O.is also directed to summon the present & past Directors of the assessee company and the subscriber companies and examine them.
The A.O.should also examine as to when this company was sold.
At that point of time the fictitious assets such as shares in other companies or loans given to other companies is converted back into cash by credit in the assessee company’s bank account.
The source of this money also needs to be examined.
Further, information should be sent to the A.Os of the subscriber companies and to the other companies through which the capital has been rotated regarding the findings of the A.O.Subsequent to the inquiries & verification of all relevant aspects of the case, the A.O.should pass a speaking order after providing adequate opportunity to the assessee.” The Tribunal has upheld the order.
The assessee has come up in appeal.
Mr.Poddar, learned senior advocate appearing for the appellant- assessee advanced the following submissions:(1)Before an order under Section 263 can be passed, the Commissioner is obliged to satisfy twin conditions: (i)that the order passed by the assessing officer is erroneous and; (ii) that the order is prejudicial to the interest of the revenue.
Unless both these conditions are satisfied, the CIT has no jurisdiction to tinker with the order of the assessing officer.
(2) Receipt of share capital during the relevant assessment year was not a taxable event.
He drew our attention to Section 56(2)(viib) which was introduced with effect from 1st April, 2013 which reads as follows:“56.
Income from other sources.— (1)… (2) In particular and without prejudice to the generality of the provisions of sub-section (1).the following incomes shall be chargeable to income tax under the head “Income from other sources”, namely:— .
.
(vii-b) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received— (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Explanation.—For the purposes of this clause,— (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a).clause (b) and clause (c) of 17[Explanation].to clause (23-FB) of Section 10;].” He contended that the eyebrows were raised because the assessee issued shares of Rs.10/- each at a premium of Rs.390/-.
Even assuming that the shares were over-priced, the same would not become taxable during the relevant assessment year.
If it is not a taxable income there can be no consequent loss of revenue.
Therefore the order passed by the assessing officer cannot be prejudicial to the interest of the revenue.
(3) The concept of arms length pricing in a domestic transaction was introduced for the fiRs.time with effect from 1st April, 2013 by introducing Sections 92A and 92BA of the Income Tax Act.
The object of Mr.Poddar in showing this provision is that though the subscribeRs.to the share capital of the assessee, are companies managed by the same group of persons or their relations, the same is of no consequence because during the relevant assessment year the concept of arms length pricing in the domestic transaction was not there.
The enquiry directed by the Commissioner is therefore bound to be an exercise in futility unless the case of the assessee can be brought within Section 68 of the Income Tax Act.
He in support of his submissions relied upon the judgement in the case of CIT, West Bengal –versus Calcutta Discount Company Limited reported in (1973) 91 ITR8(SC) wherein the following views were expressed:“The question that, when an assessee transfers some of his stock-in-trade to another person at a price less than the market price, whether that assessee can be considered to have made any profit merely because he has transferred some of his stock-intrade not at the market price but at a lesser price, came up for consideration before the High Court of Madras in Sr.Ramalinga Choodambikai Mills Ltd.v.CIT [(1955) 28 ITR952(Mad)].The facts of that case as set out in the head-note are: a limited company sold certain goods showed in its stock-in-trade to its managing agency firm and to another firm in which one of its directors was interested.
The sales in question were held to be bona fide sales.
At the same time it was held that the goods were sold at a concessional rate.
The Income Tax Officer sought to tax the assessee therein after computing the profits earned by that firm on the basis of the market price of the goods sold and not the actual price at which those goods were sold.
The assessee challenged the said basis.
The Tribunal upheld the contention of the assessee.
It came to the conclusion that the assessee had, in reality, made no profits at all.
The High Court agreed with the conclusion reached by the Tribunal.
It opined that, in the absence of any evidence to show either that the sales were sham transactions or that the market prices were in fact paid by the purchaseRs.the mere fact that the goods were sold at a concessional rate to benefit the purchasers at the expense of the company would not entitle the Income Tax Department to assess the difference between the market price and the price paid by the purchaseRs.as profits of the company.
A somewhat similar question came up for consideration before this Court in CIT v.A.Raman & Co.[(1968) 1 SCR10(SC) : (1968) 67 ITR11 It is unnecessary to set out the facts of that case and it is sufficient to refer to the relevant observations in the judgment.
Shah, J., (as he than was).speaking for the Court, stated the law at p.
17 of the report, thus: “The plea raised by the Income Tax Officer is that income which could have been earned by the assessees was not earned, and a part of that income was earned by the Hindu undivided families That according to the Income Tax Officer was brought about by ‘a subterfuge or contrivance’.
Counsel for the Commissioner contended that if by resorting to a ‘device or contrivance’, income which would normally have been earned by the assessee is divided between the assessee and another person, the Income Tax Officer would be entitled to bring the entire income to tax as if it had been earned by him.
But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions.
Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned, is not made taxable as income accrued to him.
By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment a case for commencing a proceeding for reassessment under Section 147(b) may be made out.
Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited.
A taxpayer may resort to a device to divert the income before it accrues or arises to him.
Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income Tax Act.
Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented.” It is a well accepted principle of law that an assessee can so arrange his affairs as to minimise his tax burden.
Hence, if the assessee in this case has arranged its affairs in such a manner as to reduce its tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus foregoing part of its own profits and at the same time enabling its subsidiary to earn some profits, such a couRs.is not impermissible under law.” He submitted that Section 92BA has been enacted and given effect from 1st April, 2013 in order to avoid the applicability of the aforesaid judgement of the Apex Court in the case of CIT –versus Calcutta Discount Co.LTD.(4) He drew our attention to Schedule 10 of the Companies Act in order to show that the increase in the authorized share capital can be made subject to payment of fees prescribed therein.
In order to avoid to pay the fees the assessee chose to price the shares at Rs.10/- each and to collect the sum of Rs.390/- per share by way of premium.
(5) All the documents required by the assessing officer by the notice under Section 142(1) of the Income Tax Act were duly submitted and they have also been produced before us.
There is nothing in the documents, according to him, to arouse any suspicion with regard to (i ) identity, (ii) genuineness of the transaction and (iii) creditworthiness of the applicants of shares.
It cannot therefore be said that the assessing officer either did not apply his mind or omitted to make necessary enquiry.
He added that the revenue did not disclose anything to contradict the documents disclosed by the assessee or to disprove them or even to dispute the correctness thereof.
(6) Commenting upon the order under Section 263 Mr.Poddar contended that the Commissioner has opined that:“a) bank statements of the subscribing companies is for a very limited period and not for the whole year”.
Mr.Poddar contended that the bank statements for the entire relevant period were furnished.
The Commissioner in his order under Section 263 opined that “analysis of this statement does not throw any light whatsoever on the source of funds of the subscriber companies.” Mr.Poddar contended that the source of fund of each of the subscribing company including cheque numbers and the nature of receipt except in a few cases were duly furnished by the assessee to the assessing officer.
He submitted that those bank statements have also been produced before us for our convenience.
He filed a booklet containing the source and nature of receipts of each of the subscribing company.
(b) The Commissioner opined that:“the replies were just placed on record and no independent inquiries were carried out regarding the fact whether the subscribing companies were available at the given address, whether they had the financial capability to invest such substantial amounts and whether they were genuine corporate entities.” Mr.Poddar contended that the particulars of Pan Card, acknowledgement of return, bank statements, application for shares, source of money, balance- sheet showing investment made by the subscribers with the assessee were all furnished before the Assessing Officer and they have also been produced before us.
The finding recorded by the Commissioner is also belied, according to him, by the fact that notices issued to 15 out of 39 subscribers by the Assessing Officer under Section 133(6) of the Income Tax Act were duly served and the noticees duly responded thereto which goes to show beyond any pale of doubt that the subscribing companies were very much available at the given address.
(c) The Commissioner opined that:“In the recent yeaRs.it has become a common practice to introduce unaccounted money by way of share capital in dummy companies.
The present assessee company is part of the large number of such cases in Kolkata as well as other parts of the country.
The share capital is introduced by rotating the money to dummy companies which have been created solely for this purpose.
The Directors of such companies are more often than not low paid employees such as peons, darbans, drivers or other persons of humble means.
The modus operandi for introduction of unaccounted money as share capital is that unaccounted cash is deposited in the bank accounts of different persons/companies.
After this, the money is transferred by way of cheques to other companies and this is done 3 to 4 layeRs.the money reaches its intended destination and this company is then sold off to the group or person who will ultimately use the money.
He in turn, returns the amount of share capital and premium in cash to the person from whom the company is purchased.
Thus, when share capital is introduced at huge premium in new-formed companies with no business, it should raise the suspicion of the A.O.In fact, such high premium is not commanded even by blue chip quoted companies.
Under these circumstances, the A.O.is duty bound to carry out through & detailed inquiries and go beyond the layers created by the so called “entry operators” so that it may be established that the share capital is bogus.” Mr.Poddar, contended that the Commissioner has drawn upon his imagination without any factual basis and without any evidence in support thereof.
He contended that the finding is perveRs.to the core.
He did not, however dispute that the share capital in this case was introduced by rotating the money.
But he objected to the use of the expression “Dummy Companies” because each of the companies is registered with the Income Tax Authorities and other statutory authorities.
He submitted that the rotation of money is, in any event, on capital account and has no revenue effect and is, therefore, irrelevant.
Mr.Poddar contended that the order of the Commissioner is perverse.
The perversity of the finding could further be illustrated by the fact that in the case before us, there has been no transaction in cash.
Therefore, the finding that the company returns the amount of share capital and premium in cash is altogether baseless.
(d) He drew our attention to the following finding of the Commissioner:“It also needs to be pointed out that this assessee’s case is not an isolated example.
There are hundreds of such cases in this charge and other charges where the modus operandi is identical.
Once the money has been rotated though 3 to 4 companies, return of income is filed showing very nominal income.
Subsequent to this, a letter is written to the A.O.that inadvertently the assessee company has left out some minor item of income or claimed some deduction wrongly and the A.O.is requested to issue notice u/s.148.
Thereafter, in the proceedings u/s.148, inquiries are carried out in a routine and superficial matter.
Confirmations & other documents regarding the share capital are filed which are placed on record.
Thereafter, order u/s.147/143(3) is passed adding back the amount offered by the assessee supposedly left out by mistake.
It is needless to say that no independent inquiries are carried out regarding the share capital.
The company is then passed on to the final purchaser after charging a percentage of the capital in the company.
This modus operandi has been confirmed in may search operations carried out by the Investigation Wing on entry operators & others over the past few years.” Mr.Poddar contended that there is nothing to show that the assessee requested for issuance of any notice under Section 148 of the Income Tax Act.
The assessee merely pointed out a mistake discovered subsequent to filing of the return.
This, the assessee did in compliance of Section 273A.
Uncharitable remarks cannot be passed against the assessee simply because he complied with the law.
(e) The Commissioner relied upon the judgement in the case of Sumati Dayal –versus CIT reported in (1995) 214 ITR801(SC) which, according to him has no manner of application because in that case there was evidence which is altogether absent in the case before us.
He submitted that the judgement in the case of CIT –versus Nova Promoters and Finlease (P) LTD.reported in 342 ITR169is not applicable to the facts of this case because in that case there were confessional statements which is not there in this case.
He submitted that the judgements in the case of CIT –versus Durga Prasad More, relied upon by the Commissioner, reported in (1982) 71 ITR540and the judgement in the case of CIT –versus Precision Finance PVT.LTD.reported in (1994) 208 ITR465are also distinguishable and have no applicability to the facts and circumstances of this case.
In the case of Precision Finance PVT.LTD.there was nothing to show that the transaction was genuine, whereas in the present case each and every link of the transaction has been proved to the hilt, according to him.
(f) He also drew our attention to the Black money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 only to show that the aforesaid act applies only to an undisclosed income earned abroad.
(g)The Prevention of Money Laundering Act, 2002 (hereinafter referred to as ‘PMLA’) defines the offence of money laundering under Section 3 thereof which reads as follows:“3.
Offence of money-laundering.— Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of moneylaundering.” The expression ‘proceeds of crime’ used in Section 3 has been defined in 2(u) which reads as follows:- “‘proceeds of crime’ means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property [or where such property is taken or held outside the country, then the property equivalent in value held within the country ]..” Only such property may become proceeds of crime which has been derived as a result of criminal activity relating to a scheduled offence.
The scheduled offences have been classified in three parts A, B and C.
Neither of the parts include any offence under the Income Tax Act.
He therefore, contended that the PMLA, even assuming that the Commissioner has referred to in his order under Section 263, can have no manner of application to the facts and circumstance of this case.
(h) He submitted, which we quote verbatim, that “supposing there is a chain; the last or the fiRs.person in the chain, admits to have applied unaccounted fund in the transaction or it is proved that unaccounted funds have, in fact been used by him, even then there is no material to show or link the unaccounted fund with the assessee.
In that case the person who admits or is proved to have used unaccounted funds can be assessed under Section 68.
The others cannot be assessed because for the same money repeated assessments cannot be made.
For the purpose of taxing the assessee under Section 68 nexus between the assessee and the unaccounted money has to be established.
In the ultimate analysis the object of any investigation is to find out whether there has been any unaccounted transaction which can come within the provision of Section 68 of the Income Tax Act.” Section 68, he contended, insists upon the satisfaction of the assessing officer.
Unless the satisfaction of the assessing officer is perverse, the CIT has no jurisdiction to interfere.
(7) The next submission advanced by Mr.Poddar is that before the Commissioner exercises jurisdiction under Section 263 he is bound to conduct enquiry himself.
He in support of his submission relied upon the views expressed in the case of ITO –versus DG Housing Projects Ltd., reported in (2012) 343 ITR329wherein the following views were expressed:“Thus, in cases of wrong opinion or finding on the merits, the Commissioner of Income-tax has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under section 263 is passed.
In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded.
The Commissioner of Income-tax cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous.
In cases where there is inadequate enquiry but not lack of enquiry, again the Commissioner of Income-tax must give and record a finding that the order/inquiry made is erroneous.
This can happen if an enquiry and verification is conducted by the Commissioner of Inome-tax and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in law.
In some cases possibly though rarely, the Commissioner of Income-tax can-also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same.
However, the said finding must be clear, unambiguous and not debatable.
The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous.
Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under section 263 of the Act.
In such matteRs.to remand the matter/issue to the Assessing Officer would imply and mean the Commissioner of Income-tax has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.” The aforesaid views in the case of D.G.Housing Projects were also echoed in the case of Director of Income Tax –versus Jyoti Foundation reported in (2013) 357 ITR388(Del).(8) He in support of his submission that any further investigation is not only not called for but is also not permissible relied upon the following judgements:- (a)CIT –versus Steller Investment LTD.reported in (1991) 192 ITR287(Delhi).The Delhi High Court refused to admit reference when the revenue sought to challenge an order of the Tribunal setting aside an order under Section 263 holding as follows:“The petitioner seeks reference of the following question: “Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct both on facts and in law in holding that the provisions of section 263 have not been validly invoked in this case by ignoring the material fact that the Assessing officer had failed to discharge his duties regarding the investigation with regard to the genuineness and creditworthiness of the shareholdeRs.many of them being students and housewives?.” In the present case, the subscribed capital of the assessee had been increased.
The Income-tax Officer assessed the company and accepted the increase in the subscribed capital.
The Commissioner of Income-tax came to the conclusion that the Assessing Officer did not carry out a detailed investigation inasmuch as there had been a device of converting black money into white by issuing shares with the help of formation of an investment company.
The Commissioner of Income-tax further held that the Assessing Officer did not make enquiries with regard to the genuineness of the subscribers of the share capital.
He thereupon set aside the order of assessment.
The Tribunal reversed this decision for reasons which we need not go into.
It is evident that even if it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee.
It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons.
IF the assessment of the persons who are alleged to have really advanced the money is sought to be reopened, that would have made some sense but we fail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself.
In our opinion, no question of law arises and the petition is, therefore, dismissed.” The aforesaid views of the Delhi High Court were unsuccessfully challenged before the Supreme Court.
The Supreme Court refused to entertain the special leave petition holding as follows:“We have read the question which the High Court answered against the Revenue.
We are in agreement with the High Court.
Plainly, the Tribunal came to a conclusion on facts and no interference is called for.
The appeal is dismissed.
No order as to costs.” (b) Before the special leave petition was dismissed by the Supreme Court in the case of Steller Investment Ltd., the question had once again cropped up before the Delhi High Court in the case of CIT –versus Sophia Finance LTD.reported in (1994) 205 ITR98(Full Bench) wherein the following views were expressed:“As we read section 68 it appears that whenever a sum is found credited in the books of account of the assessee then, irrespective of the colour or the nature of the sum received which is sought to be given by the assessee, the Income-tax Officer has the jurisdiction to enquire from the assessee the nature and source of the said amount.
When an explanation in regard thereto is given by the assessee, then it is for the Income-tax Officer to be satisfied when the said explanation is correct or not.
It is in this regard that enquiries are usually made in order to find out as to whether, firstly, the persons from whom money is alleged to have been received actually existed or not.
Secondly, depending upon the facts of each case, the Income-tax Officer may even be justified in trying to ascertain the source of the depositor, assuming he is identified, in order to determine whether that depositor is a mere name-lender or not.
be that as it may, it is clear that the Income-tax Officer has jurisdiction to make enquiries with regard to the nature and source of a sum credited in the books of account of an assessee and it would be immaterial as to whether the amount so credited is given the colour of a loan or a sum representing the sale proceeds or even receipt of share application money.
The use of the words “any sum found credited in the books” in Section 68 indicates that the said section is very widely worded and an Income-tax Officer is not precluded from making an enquiry as to the true nature and source thereof even if the same is credited as receipt of share application money.
If the amount credited is a capital receipt then it cannot be taxed but it is for the Income-tax Officer to be satisfied that the true nature of the receipt is that of capital.
Merely because the company chooses to show the receipt of the money as capital, it does not preclude the Income-tax Officer from going into the question whether this is actually so.
Section 68 would clearly empower him to do so.
Where, therefore, the assessee represents that it has issued shares on the receipt of share application money then the amount so received would be credited in the books of account of the company.
The Income-tax Officer would be entitled to enquire, and it would indeed be his duty to do so, whether the alleged shareholders do in fact exist or not.
If the shareholders exist then, possibly, no further enquiry need be made.
But if the Income-tax Officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital.
Shares cannot be issued in the name of non-existing persons.
The use of the words “may be charged” (emphasis * added) in section 68 clearly indicates that the Income-tax Officer would then have the jurisdiction, if the facts so warrant, to treat such a credit to be the income of the assessee.
It is neither necessary nor desirable to give examples to indicate under what circumstance section 68 of the Act can or cannot be invoked.
What is clear, however, is that section 68 clearly permits an Income-tax Officer to make enquiries with regard to the nature and source of any or all the sums credited in the books of account of the company irrespective of the nomenclature or the source indicated by the assessee.
In other words, the truthfulness of the assertion of the assessee regarding the nature and the source of the credit in its books of account can be gone into by the Income-tax Officer.
In the case of Steller Investment LTD.[1991].192 ITR287(Delhi).the Income-tax Officer had accepted the increased subscribed share capital.
Section 68 of the Act was not referred to and the observations in the said judgement cannot mean that the Income-tax Officer cannot or should not go into the question as to whether the alleged shareholders actually existed or not.
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 regard as a capital receipt and to that extent the observations in the case of Steller Investment LTD.[1991].192 ITR287(Delhi).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 section 68 may be invoked.
In the latter case section 68, being a substantive section, empowers the Income-tax Officer 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.” Mr.Poddar contended that the existence of the share-holders in this case has duly been proved.
Therefore, even the judgement in the case of Sophia Finance LTD.does not militate against the assessee.
(c) The next judgement relied upon by Mr.Poddar is in the case of CIT –versus Lovely Exports PVT.LTD.reported in (2008) 299 ITR268(Delhi) wherein the following views were expressed:“Therefore, for a detailed discussion on Section 68 one should fiRs.turn to Gee Vee Enterprises v.
Addl.
CIT (1975) 99 ITR375(Delhi) and thence finally to the decision of the Full Bench of this Court in Sophia Finance (1994) 205 ITR98 In Gee Vee Enterprises –versus Addl.
CIT (1975) 99 ITR375(Delhi).the Division Bench had in the context of a challenge to the maintainability of the writ petition on the grounds of the availability of an alternative remedy laid down situations which would justify the invocation of Article 226 of the Constitution.
The Bench had also opined that (page 384).“the intention of the Income Tax Officer as erroneous not only because it contains some apparent error of reasoning or of law or of fact on the fact of it but also because it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make inquiries which are called for in the circumstances of the case.” It was further observed that the Assessing Officer is both an adjudicator as well as an investigator, and it is his duty to ascertain the truth of the facts stated in the return if such an exercise is “provoked”, or becomes “prudent”.
The Bench held that Section 263 which deals with the revision of orders prejudicial to the Revenue by the Commissioner comes into operation wherever the Assessing Officer fails to make such an inquiry, because it renders the order of the Assessing Officer “erroneous”.
It seems to us that if this duty pervades the normal functioning of the Assessing Officer, it becomes acute and essential in the special circumstances surrounding Section 68 of the Income Tax Act.
There cannot be two opinions on the aspect that the pernicious practice of conversion of unaccounted money through the masquerade or channel of investment in the share capital of a company must be firmly excoriated by the Revenue.
Equally, where the preponderance of evidence indicates absence of culpability and complexity of the assessee it should not be harassed by the Revenue’s insistence that it should prove the negative.
In the case of a public issue, the company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribeRs.The company must, however, maintain and make available to the Assessing Officer for his perusal, all the information contained in the statutory share application documents.
In the case of private placement the legal regime would not be the same.
A delicate balance must be maintained while walking the tightrope of sections 68 and 69 of the Income-tax Act.
The burden of proof can seldom be discharged to the hilt by the assessee; if the Assessing Officer harbours doubts of the legitimacy of any subscription he is empowerd, nay duty-bound, to carry out thorough investigations.
But if the Assessing Officer fails to unearth any wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the company.
“in this analysis, a distillation of the precedents yields the following propositions of law in the context of section 68 of the Income-tax Act.
The assessee has to prima facie prove (1) the identity of the creditor/ subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber; (4) if relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the shareholders register, share application forMs.share transfer register, etc., it would constitute acceptable proof or acceptable explanation by the assessee.
(5) The Department would not be justified in drawing an adveRs.inference only because the creditor/subscriber fails or neglects to respond to its notices; (6) the onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the assessee nor should the Assessing Officer take such repudiation at face value and construe it, without more, against the assessee; and (7) the Assessing Officer is duty-bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and the veracity of the repudiation.” “The Commissioner of Income-tax (Appeals) deleted the addition for the reason that the identity of the shareholders had been established on the strength of Steller Investment, which approach may not be entirely correct in the light of the discussion above.
We have already concluded that this merely shifts the burden of proving the illegal or illegitimate nature of the transaction onto the Department.
The investigations carried out by the Assessing Officer in Calcutta cannot be relied upon by the Assessing Officer, Bulandshahar, consequent on those proceedings being found to be without jurisdiction.
While rejecting the assault of the Revenue on this aspect the Income-tax Appellate Tribunal has cogently noted that the share capital issued to the original shareholders in the assessment year 198485, which had been cancelled by the Assessing Officer, Calcutta, was found to be valid by the jurisdictional Assessing Officer at Bulandshahar.
But we hasten to clarify that the statement of law made by the Income-tax Appellate Tribunal to the effect that in case of share capital no additions could be made if it is established that the shareholders exist is not completely correct and has not been so enunciated by this Court in Sophia Finance [1994].205 ITR98(Delhi) [FB]..” A special leave petition filed by the revenue challenging the order of the Delhi High Court in the case of Lovely Exports PVT.LTD.was dismissed in limine reported in CIT –versus Lovely Exports PVT.LTD.(2009) 319 ITR (St.) 5 (SC).Mr.Poddar strongly relied upon the opinion expressed by the Apex Court in dismissing the special leave petition which reads as follows:“We find no merit in this special leave petition for the simple reason that if the share application money is received by the assessee-company from alleged bogus shareholdeRs.whose names are given to the Assessing Officer, then the Department is free to proceed to reopen their individual assessments in accordance with law.
Hence, we find no infirmity with the impugned judgement.” : CIT v.
Lovely Exports P.
LTD.: S.L.P.
(Civil ) No.1153 of 2008.” Mr.Poddar submitted that the views expressed by the Apex Court in the case of Steller Investment LTD.were really endorsed by the aforesaid views expressed in the Lovely Exports PVT.LTD.The main plank of the argument advanced by Mr.Poddar is that if the share application money received by the assessee, is bogus, the department is free to proceed to reopen the individual assessment of the applicants of the shares.
He contended that the views expressed by the Apex Court both in the case of Steller Investment LTD.and Lovely Exports PVT.LTD.were binding and therefore, the assessing officer could not have taken a different view of the matter.
The Commissioner, according to him, drawing upon his imaginary grounds interfered with the order of the assessing officer and that was erroneously upheld by the learned Tribunal.
(d) Mr.Poddar drew our attention to a judgement of the Tribunal in ITA No.479/KOL/2011 M/S.Lotus Capital Financial Services LTD.–versus ITO wherein an order under Section 263 passed by the Commissioner of Income Tax was quashed on the ground that:“We are of the view that the assessee has filed complete details names, addresses, No.of share applied for and allotted, cheque nos., name of bank on which cheques were issued to shareholders and even this was verified through notices u/s.133(6) of the Act and in response to these notices, the prospective shareholders also replied to the assessee, and the confirmations are on record even before us, the same clearly reveals that complete information was available before the Assessing Officer at the time of framing of assessment and he has given this finding in his order passed u/s.143(3) of the Act.
We, after going through provisions of section 263 of the Act, find that Commissioner can revise assessment order passed by Assessing Officer only if – (i)it is erroneous, and (ii) it is prejudicial to the interests of the revenue.
If the order sought to be revised is not prejudicial to the interests of the revenue, Commissioner has no jurisdiction to revise it.
For instance, an order of assessment passed by an Assessing Officer without complying with the procedure laid down in the pre 1989 section 144B of the Act is erroneous, but cannot be said to be prejudicial to the interests the revenue.
Similarly, failure of the Assessing Officer to deal with the claim of the assessee in the assessment order may be an error, but an erroneous order by itself is not enough to give jurisdiction to Commissioner to revise it under section 263 of the Act.
It must further be shown that the order was prejudicial to the interests of the revenue and it is not each and every order passed by the Assessing Officer which can be revised under section 263 of the Act.
A bare reading of section 263(1) makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the AO is erroneous in so far as it is prejudicial to the interests of the Revenue.
The Commissioner has to be satisfied with twin conditions, namely, ( i ) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue.
If one of them is absent -if the order of the AO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recouRs.cannot be had to section 263(1).This view is taken by Hon’ble Apex Court in the case of Malabar Industrial Co.Ltd.v.CIT (2000) 243 ITR83 88 (SC).Accordingly, in the present case before us, the assessment framed by AO is neither erroneous nor prejudicial to the interest of revenue and this is clearly demonstrated by facts discussed by AO in his order and documents produced before us by assessee.
Accordingly, we set aside the order of CIT passed u/s.263 of the Act being not as per law.” (e)This Court in ITAT No.125 of 2012 CIT –versus M/S.Lotus Capital Financial Services PVT.LTD.refused to admit an appeal preferred by the revenue.
The object of citing this judgement, Mr.Poddar contended, is that the facts and circumstances of the case before us are on all fours of the aforesaid judgment and, therefore, a similar view should be taken.
(f) In an unreported judgement of this Court in the case of CIT –versus M/s Dataware PVT.LTD.(ITAT No.263 of 2011) addition made by the assessing officer was deleted by the CIT(A) on the ground that the identity of the creditor had been well-established, creditworthiness of the creditor was also proved and the CIT was convinced about the genuineness of the transaction.
The order of th