Income Tax Appellate Tribunal - Indore
Dy. Cit vs Rahul Products Ltd. on 16 June, 2006
ORDER
Bhavnesh Saini, J.M.
1. Both the cross appeals are directed against the order of Commissioner (Appeals)-I, Indore dated 30-12-1999 for assessment year 1996-97.
2. We have heard learned representatives of both the parties and gone through the observations of the authorities below.
ITA No. 27/Ind./2000
3. The revenue has challenged the order of Commissioner (Appeals) deleting addition of Rs. 9,28,000 under Section 68 of the Income Tax Act.
4. The facts of the case are that the assessing officer noted from the balance-sheet of the assessee-company about fresh introduction of cash credit in the shape of share application money amounting to Rs. 9,28,000. The assessee was requested to file following details in this regard:-
1. Present address of the share applicants.
2. Confirmation from them.
3. Share applicants I.T. details with acknowledgement slip and balance-sheet.
4. Mode and date of payment.
The assessing officer perused the details filed in response to the letter and seen that the entire amount has been shown to have been received from 10 different individuals residing in different and distant rural parts of Maharashtra and M.P. The occupations of the share applicants were shown as agriculture. The entire payment has been received by way of D.D./pay order. The assessing officer issued letters under Section 133(6) calling for information to all the ten cash creditors on the addresses furnished by the assessee in the course of hearing. All of them were requested to personally appear before him to file the following details and explanation:-
1. Copy of bank account, through which payment has been made.
2. I.T. acknowledgement slip and balance-sheet if they are income-tax payees.
3. Source of investment.
Out of ten letters, six letters came back unserved with the remark 'not known' 'not traceable'. In the case of remaining four persons, none appeared before the assessing officer. Written submissions were filed by them stating that they have invested the amount but neither source of the said investment nor genuineness of the transaction could be proved. All these facts were brought to the notice of the assessee. The assessee submitted before the assessing officer that addresses available with the company were filed and in some cases there is a little change in the address. The assessing officer, however, observed that the assessee was directed to give present address at the beginning of the assessment itself, but the assessee did not file any changed address. Assessee was again requested to produce all the cash creditors on 23-11-1998 for proving the genuineness of the transactions and creditworthiness of the cash creditors. On the date fixed, out of ten creditors only one person appeared before the assessing officer, namely, Shri Ramesh Chandra Shukla and the assessing officer noticed from his submission that he did not remember the date on which payment was made. He did not have any bank account. He also did not have I.T. number. Pay order was purchased at Indore, though he resides in Harda. He did not have any proof regarding source of so much cash on that date. He did not have any receipt for Pay order given to Mr. Jain of Rahul Products Ltd. The assessing officer in the meantime conducted independent enquiry from State Bank of Indore, University Branch from where Pay Orders and D.D. were purchased. The assessing officer noticed that though all the share applicants are residing in different parts of Maharashtra and M.P. but all the D.Ds. and Pay Orders were purchased in Indore. The bank was requested to furnish photocopy of the Pay Order/D.D. slips. Assessing Officer on verification of the signatures found that signatures of the share applicants did not match. These facts were also brought to the notice of the assessee. The assessee again reiterated regarding change of address. The assessing officer in view of the above facts noted that out of ten share applicants, six were not traceable thereby making the physical existence /genuineness of the creditors doubtful. The Assessing ~Officer also observed that assessee could not produce all the creditors even after giving opportunity. The assessing officer also noticed that it is unimaginable as to why all the Pay Orders and D.Ds. were purchased in Indore, particularly, when none of the share applicants was residing in Indore. The assessing officer also noted that the signatures of the share applicants did not match. The assessing officer also noted that creditworthiness of the creditors is in doubt and as such assessee has failed to prove three conditions, namely, identity of the creditors, creditworthiness of the creditors and genuineness of the transactions. The assessing officer, accordingly, made addition of Rs. 9,28,000 under Section 68 of the Income Tax Act. The additions were challenged before the Commissioner (Appeals) and written submissions were filed in which assessee had filed voluminous details to support the genuineness of the share application money received, identity, creditworthiness and genuineness of the share applicants. It was also submitted that Ramesh Chandra Shukla, one of the share applicants was examined by the assessing officer. It was further submitted before the Commissioner (Appeals) that the decision of the Delhi High Court in the case of CIT v. Sophia Finance Ltd. is applicable and it was submitted that tests under Section 68 are not strictly applicable in the case of share application money. During the course of appeal, assessee has placed on record affidavits of the share applicants confirming the fact that amounts have been deposited by the share applicants with the assessee. These were forwarded to the assessing officer for his comments and the assessing officer contended that affidavits are self-serving and should be rejected out rightly. Commissioner (Appeals), considering these facts, held that the identity of the share applicants for making investment in assessee-company is confirmed and purchase of share is also proved by the confirmation and affidavits of the share applicants placed on record. The Commissioner (Appeals), considering decision of Delhi High Court in the case of Sophia Finance Ltd. (supra) deleted the entire addition. The revenue is in appeal.
5. Learned DR relied upon the order of the assessing officer and submitted that out of ten creditors, six creditors could not be served letters under Section 133(6) because same were returned with the remarks 'not known' and 'not traceable' and even out of four creditors, who have filed their reply before the assessing officer, only one creditor appeared before the assessing officer. Therefore, the identity of the creditors has not been established. The existence of the creditors is in doubt. Learned DR submitted that the material collected by the assessing officer at the assessment stage is sufficient to hold that the existence of the creditors has not been proved at all by the assessee. Therefore, decision of Sophia Finance Ltd. (supra) is not applicable in this case. Learned DR relied upon following decisions:
CIT v. Dhar Ispat (P) Ltd. (2003) 180 CTR (MP) 491;
CIT v. Kundan Investment Ltd. ;
CIT v. Nivedan Vaniiya Niyojan Ltd. ; and CIT v. Ruby Traders & Exporters Ltd.
Learned DR submitted that the assessee must prove genuineness of the transaction and creditworthiness of the subscriber even in case of share application money.
6. On the other hand, learned Counsel for the assessee relied upon order of Commissioner (Appeals) and submitted that assessee has proved the identity of the creditors and genuineness of the transactions. Therefore, Commissioner (Appeals) was justified in allowing appeal of the assessee. In support of his contention, he has relied upon order of ITAT, Nagpur Bench in the case of Assistant Commissioner v. Venkateshwar Ispat (P) Ltd. 5 ITJ 375, decision of Supreme Court in the case of CIT v. Steller Investment Ltd. decision of Gauhati High Court in the case of CIT v. Down Town Hospital (P.) Ltd. (Gau) and decision of Rajasthan High Court in the case of Barkha Synthetics Ltd. v. Assistant Commissioner (2005) 197 CTR (Raj.) 432.
7. We have considered rival submissions and material available on record. Hon'ble Delhi High Court (FB) in the case of Sophia Finance Ltd. (supra) considered its earlier decision in the case of Steller Investment Ltd.'s case (supra) and held that under Section 68 of the Income Tax Act, Income Tax Officer has jurisdiction to make enquiries with regard to nature and source of sum credited in the books of account of the assessee and it is immaterial as to whether the amount so credited is given the colour of loan or a sum representing sale proceeds or even receipt of share application money. The use of the words any sum found credited in the books in Section 68 in case that section is very widely worded and the Income Tax Officer is not precluded from making an enquiry as to the true nature and source of a sum credited in the account books even if it is credited on receipt of share application money. it was further held that if the shareholder exists then possibly, no further enquiry need be made. But if the Income Tax Officer found that the alleged shareholders did not exist, then, in effect, it would mean that there is no valid issuance of share capital. The shares cannot be issued in the name of non-existing persons. It was further held, if the shareholders are identified and established that they have invested money in purchase of shares, then the amount received by the company would be regarded as capital receipt and to that extent the observations in the case of Steller Investment Ltd. (supra) are correct, but if on the other hand, the assessee offers no explanation at all or explanation offered is not satisfactory, then the provisions of Section 68 may be invoked. In the cases relied upon by learned DR Dhar Ispat (P) Ltd.s (supra) Kundan Investment Ltd. (supra) Nivedan Vanijya Niyojan Ltd. (supra) and Ruby Traders & Exporters Ltd. (supra), it was held that "burden of proof - Company - Subscription received by Company -Company must prove genuineness of transaction and creditworthiness of subscribers". It is also held that "if identity of the subscribers are not established and no evidence of genuineness of transaction is furnished, the amount is assessable under Section 68". Hon'ble M.P. High Court in the case of Dhar Ispat (P) Ltd. (supra) held Section 68 is applicable in respect of share application money. However, question of genuineness of the entries regarding share application money is a question of fact to be decided by the assessing officer on the basis of evidence available on record.
8. The decision referred to by learned Counsel for the assessee in the case of Bharkha Synthetics Ltd. (supra), it was held that assessee is only to prove the existence of the persons in whose names share application is received. Once existence of investor is proved, there is no further burden on the assessee to prove whether that person itself has invested the said money or some other person has made investment in the name of that person. In the case of Down Town Hospital (P) Ltd. (supra) the finding of the fact was that identity of the creditors had been established. Therefore, it was held that Tribunal is justified in deleting the addition. In the case of Steller Investment Ltd. (supra), Hon'ble Supreme Court dismissed the petition of the revenue holding that the Tribunal came to the conclusion on fact and no interference is called for in the case of Venkateshwar Ispat (P) Ltd. (supra), the Nagpur Bench of the Tribunal considered that Commissioner (Appeals) rightly considered the case of the assessee that assessing officer did not have any clinching evidence to show that the shareholders exist on the shareholders list of the company was not genuine.
9. Considering the above decisions, it is clear that burden of proof was upon the assessee to prove identity of the creditors and also to prove that creditors, in fact, exist and made the investment in the purchase of share capital. However, in the present case, the assessing officer has specifically noted that out of ten creditors, the letters issued to six creditors returned with the remark 'not-known' and 'not traceable'. The assessing officer wanted to examine four of the creditors who have filed their replies in order to find out the genuineness of the transactions because of the fact that certain material was collected against the assessee from State Bank of Indore. The assessing officer wanted to examine as to why Drafts have been purchased from Indore, though none of the creditors is residing at Indore. Those facts coupled with fact that only four creditors replied before the assessing officer were sufficient to raise doubt against investment in share capital by 10 creditors. The assessing officer therefore, directed the assessee to produce all the creditors for examination, The assessing officer is the first assessing authority to make investigation an enquiry into the matter. The assessing officer had doubt about genuineness of the transaction. Therefore, he directed the assessee to produce all the creditors. But the assessee only produced one person out of the four, who have filed their replies before the assessing officer. No reasons whatsoever have been given as to why the remaining persons did not appear before the assessing officer. At the appellate stage, the assessee filed affidavits of all the creditors, which were forwarded to the assessing officer for his comments. The Commissioner (Appeals) has chosen the way which is not justified under the law. The Rule 46A of the IT. Rules provides for admission of the addl. evidence at the appellate stage before Commissioner (Appeals), Rule 46A is reproduced as under:-
46A.(1) The appellant shall not be entitled to produce before the Deputy Commissioner (Appeals) oras the casemay be, the Commissioner (Appeals), any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the assessing officer, except in the following circumstances, namely:-
(a) where the assessing officer has refused to admit evidence which ought to have been admitted; or
(b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the assessing officer; or
(c) where the appellant was prevented by sufficient cause from producing before the assessing officer any evidence which is relevant to any ground of appeal; or
(d) where the assessing officer has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.
(2) No evidence shall be admitted under Sub-rule (1) unless the Deputy Commissioner (Appeals) or as the case may be, the Commissioner (Appeals) records in writing the reasons for its admission.
(3) The Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) shall not take into account any evidence produced under Sub-rule (1) unless the assessing officer has been allowed a reasonable opportunity-
(a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or
(b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant.
(4) Nothing contained in this rule shall affect the power of the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the assessing officer under Clause (a) of Sub-section (1) of Section 251 or the imposition of penalty under Section 271 Considering the above Rule 46A, the Commissioner (Appeals) should have given opportunity to the assessing officer to verify the facts stated in the affidavits. The Commissioner (Appeals), however, only called for the comments of the assessing officer and even no order is passed while admitting the evidence in the shape of the affidavit at the appellate stage. The Commissioner (Appeals) has, therefore, violated Rule 46A of the I.T. Rules in this case. The finding of the Commissioner (Appeals) shows that Commissioner (Appeals) was satisfied about existence of the share applicants on the basis of confirmation and affidavits, though out of ten, six persons did not file any confirmation before the assessing officer in response to the letter issued by the assessing officer under Section 133(6). The Commissioner (Appeals) has, therefore, not considered these facts while allowing the appeal of the assessee. Even, the Commissioner (Appeals), though relied upon the decision of the Hon'ble Full Bench of Delhi High Court in the case of Sophia Finance Ltd. (supra) while deleting the addition has not considered the ratio of that case in proper perspective. The Commissioner (Appeals) ignoring all the material on record before the assessing officer deleted the addition, by placing reliance on the affidavits and confirmations which were not filed before the assessing officer. Only four persons replied before the assessing officer in response to his query.
The assessing officer wanted to make further enquiry and investigation from these four persons but only one person appeared before the assessing officer. Therefore, the right of investigation and enquiry of the assessing officer has been curtailed by the Commissioner (Appeals) and merely placing reliance on the affidavits and confirmations deleted the addition. If the Commissioner (Appeals) wanted to admit affidavits and confirmations at the appellate stage, then he should have given proper opportunity to the assessing officer to examine those evidences before arriving at the decision in the matter. These facts are sufficient to hold that the Commissioner (Appeals) without considering investigation and observations of the assessing officer deleted the addition without any basis and without giving cogent reasons in the appellate order. The assessee at the assessment stage has failed to prove existence and identity of the creditors. Therefore, the order of the Commissioner (Appeals) is liable to be set aside with direction to re-examine the matter in issue in accordance with law. We, accordingly, set aside the order of the Commissioner (Appeals) and restore the matter to the file of Commissioner (Appeals) with direction to re-examine the whole issue by giving reasonable sufficient opportunity of being heard to the assessee as well as to the assessing officer.
With these observations and discussion, the order of Commissioner (Appeals) is set aside and matter is restored to the file of Commissioner (Appeals) to re-decide this issue as per above directions.
10. As a result, appeal of the revenue is allowed for statistical purposes.
ITA No. 31/Ind./2000
11. The assessee challenged the disallowance of Rs. 23,108 out of telephone expenses and disallowance of car running and maintenance expenses of Rs. 49,560.
12. Learned Counsel for the assessee submitted that assessee is a company and no reasons whatsoever have been given by the assessing officer for making disallowance. The assessing officer merely mentioned that assessee has not maintained details of the calls, therefore, calls are made for non-business purposes and similarly vehicles are used by the Directors for non-business purposes. Learned counsel for the assessee accordingly submitted that since status of the assessee is company, therefore, no personal user of these facilities are possible. In support of his contention, he has relied upon the order of ITAT, Ahmedabad Bench C in the case of Gujarat Filament Ltd. (supra), copy of which is filed.
13. Learned DR. However, relied upon the orders of the authorities below.
14. On consideration of the above facts and considering the decision of ITAT, Ahmedabad Bench C in the case of Gujarat Filament Ltd. (supra), we are of the view that assessee being a limited company is an artificial judicial person, there could be no personal user of telephone and vehicle by the assessee. The disallowance appears to be ad hoc in nature. We, accordingly, set-aside the orders of the authorities below and delete both the additions.
15. As a result, appeal of the assessee is allowed.
16. As a result, appeal of the revenue is allowed for statistical purposes and appeal of the assessee is allowed.