Calcutta High Court
Bhola Shankar Cold Storage Pvt. Ltd. vs Joint Commissioner Of Income-Tax on 24 June, 2004
Equivalent citations: (2004)192CTR(CAL)625, [2004]270ITR487(CAL)
Author: D.K. Seth
Bench: D.K. Seth
JUDGMENT R.N. Sinha, J.
1. This appeal was admitted on the question whether, on the facts and circumstances of the case, section 68 of the Income-tax Act, 1961, could be invoked against the company floating the shares even if it is on the facts found that the applicants who had been allotted shares are not genuine inasmuch as the applicant or the person who had paid the money would be the person against whom section 68 would be invoked not the assessee until the link between the assessee-company and the shareholders' unaccounted money is established and thus it could not be regarded as undisclosed income of the assessee.
The assessee-company during the financial year 1995-96 relating to the accounting year 1996-97 introduced share capital to the tune of Rs. 29/54/000. Most of the share applicants are of rural areas of Burdwan district in West Bengal. The Assessing Officer proceeded to verify the genuineness of such huge share capital introduced. He issued summons under section 131 of the Income-tax Act to several shareholders. Most of them appeared in response to the summons. In the course of examination the Assessing Officer found that:
(a) most of the share applicants were farmers with negligible agricultural land having no other business or source of income ;
(b) they are mostly potato growers and used to sell and keep potatoes in the cold storage of the appellant;
(c) bank accounts were opened in their names on a single day just to deposit a huge sum of money and withdraw it in the next cheque for investment as share capital in the assessee-company ;
(d) even the number of bank drafts were in serial order ;
(e) none of the parties summoned could produce original share certificate nor even the bank pass-books at the time of deposition ;
(f) most of the applicants have filed Form No, 4A on payment of income-tax amounting to Rs. 1,400 showing an annual income of Rs. 8,000 to Rs. 10/000, even though agricultural income was exempted from income-tax.
On the aforesaid materials, the Assessing Officer disbelieved the credit-worthiness of these subscribers inasmuch as it is unbelievable that these persons could keep such huge sum of money at home in the form of cash just for investment in share capital at a later date. The assessee-company and its influential directors influenced the farmers by compelling them to lend name for the huge share capital introduced in a single year. Accordingly, the total amount of Rs. 29/54,000 was added back under the head as "Income from undisclosed sources" under section 68 of the Income-tax Act.
On appeal the Commissioner found that the particulars of the share applicants including their names and address, occupations, date of entry in the cash book/cheque book, the draft numbers, the amount deposited, etc., such details also contained some income-tax file number of the applicants where the files existed and where such files did not exist particulars of Form No, 4A were submitted by those persons. In the course of hearing, the minutes books of the company were produced and from the analysis of the evidence produced before the Assessing Officer and before the Commissioner it appeared that a large number of rural shareholders who were generally potato growers formed themselves together and decided to take controlling interest in the running of the said cold storage which was their access to the life-line for survival. He accordingly ordered deletion of the addition.
On further appeal before the Tribunal by the Department, the Tribunal by its order dated June 26, 2002, held inter alia, that the onus to prove the genuineness of the transaction of subscription to capital lay on the assessee. The assessee could not satisfactorily discharge the onus which lay upon the asses-see. On the materials available accordingly it was held that the inquiry in the instant case conducted by the Assessing Officer does not prove beyond doubt the identity, genuineness and creditworthiness of the parties. Reliance was placed by the Tribunal on a reported decision of CIT v. Durga Prasad More [1971] 82 ITR 540 wherein the apex court held that the taxing authorities were entitled to look into the surrounding circumstances to find out the validity of such transactions. Reliance was also placed on CIT v. Precision Finance Pvt. Ltd. wherein it was categorically mentioned that mere furnishing of particulars was not enough.
Mr. Dutta, learned counsel for the assessee, had relied on the decision in Hindusthan Tea Trading Co. Ltd. v. CIT [2003] 263 ITR 289, a decision on this point rendered by this particular Bench, Mr. Dutta goes on arguing that in the aforesaid decision it was so held that the power of the Assessing Officer under section 68 is not an absolute one. It is subject to its satisfaction where an explanation is offered. The power is absolute where the assessee offers no explanation. The satisfaction with regard to explanation is in effect an in-built safeguard in section 68 protecting the interest of the assessee. Once it is explained, it is incumbent on the Assessing Officer to consider the same and form an opinion whether the explanation is satisfactory or not. It has further been held that in the process of inquiry by the Assessing Officer the assessee has no right of hearing. But the assessee has a right to challenge the conclusion arrived at on the basis of the enquiry made. The assessee may point out the perversity in the finding. It may question the validity of the process undertaken or it may point out that a particular material was not considered and only then the onus is shifted to the Revenue to scrutinise the material and form an opinion on the basis thereof whatever may be the modes by invoking section 131 or under section 133 of the Act itself. Mr. Dutta, the learned advocate for the assessee, has further urged that where details of the income-tax file were given those are to be checked and/or scrutinised, which in this case was not done.
Mr. Shome, the learned advocate for the Revenue, had urged that nowhere a finding was so arrived about finding of the income-tax file details as were submitted on behalf of the assessee. Mr. Shome relied on CIT v. Steller Investment Ltd. which was affirmed by the apex court reported in [2001] 251 ITR 263.
Mr. Shome contended that the materials furnished by the assessee and the information found by the Assessing Officer on enquiry were such that no further enquiry was needed to be made. In case further opportunity was offered to the assessee, the same would be an empty formality. Inasmuch as there was no material on which a reasonable man can hold that the assessee was able to prove and establish the genuineness of the transaction and creditworthiness of the investors, though, however, the identity of the investors were established. According to him, it was very difficult to believe that a farmer having negligible quantum of agricultural land growing potatoes and keeping potatoes in the cold storage having no other source of income and alleged to be earning Rs. 8,000 to Rs. 10/000 a year, paying income-tax of a sum of Rs. 1,400 through Form No. 4A could keep such huge amount at home for being invested at a later date. According to him, if the income was Rs. 8/000 to Rs. 10/000 a year after meeting the expenses for his livelihood, what amount would he be able to save and for what length of period to accumulate such huge amount, which were never invested. At the same time, the bank account was opened on the same date only for the purpose of utilising the amount deposited on the very date for purchasing bank drafts and the bank drafts obtained by all the applicants bore the serial numbers in order and that none or these applicants could produce the share certificate or any other document to established that the transaction was genuine and the money belonged to them. The materials were such that no reasonable man could presume the genuineness of the transaction. Nowhere from the record did it appear that any income-tax file number was disclosed. On the other hand, the particulars of filing of Form No. 4A for that particular previous year were furnished. Furnishing particulars of Form No, 4A would not establish the creditworthiness of the investor in a case where the income earned by the applicants were alleged to have been earned from agriculture outside the purview of the Income-tax Act. It was not known why persons earning between Rs. 8/000 to Rs, 10/000 would submit Form No. 4A for the assessment year 1996-97 when the income exigible to tax under the Income-tax Act, 1961, was far above Rs. 10/000. This clearly indicated a very futile attempt to paint the colour of creditworthiness of the investors. Therefore, the ratio decided in any of the decisions cited by Mr. Dutta to support his contention would not be applicable in this case.
However, the aforesaid decision cited by Mr. Shome was distinguished by Mr. Dutta in contending that a decision becomes binding as a precedent only when the court decides a particular question of law or lays down the ratio through conscious adjudication. Agreement with the finding of fact without A adverting to the ratio laid down does not create a precedent. Reliance was placed by Mr. Dutta on Gangadharan v. Janardhana Mallan, ;
Director of Settlements v. M. R. Apparao, and Municipal Corporation of Delhi v. Gurnam Kaur, .
After hearing the rival contentions of the parties it appears to us that the true import of section 68 of the Income-tax Act is in question in the given circumstances. The aforesaid section requires a taxpayer to prove the credits in his books as to the nature and source of such amount credited so that if the explanation is not satisfactory the Assessing Officer can treat it as income of the assessee. An inference as to whether the explanation is satisfactory in any particular case is one of fact. But in a case where the inference drawn is not one which a reasonable person could have drawn it may become a mixed question of law or fact or may even be inferred to be a decision which is perverse so that it may well be a question of law. A taxpayer could not avoid the burden of proving the genuineness of the credits in his books of account by merely introducing an intermediary. In the instant case the share applicants, who are none other but farmers usually keep or sell potatoes grown by them in or to the said cold storage, may be capable of being name-lenders, Mr. Dutta pointed out that the entire amount of share capital of Rs. 29,54,000 was raised from amongst forty share applicants. But there was no mention as to how many were so summoned and what were the amounts involved therein. It further transpires that the argument which was being advanced in respect of processing of some of the income-tax file numbers of the parties is apparent from the Commissioner of Income-tax's order in the paper book at page No. 35. Even the Tribunal also did not consider the same as to whether there existed any information about the income-tax file numbers of the share applicants that being so, it cannot be so stated as has been urged by Mr. Shome, learned counsel for the Revenue, that in the instant case there was no scope of any further enquiries as it goes to show prima facie that the share applicants were earning Rs. 8/10 thousand per year and that the payments were made by cheque for payment of the share application amounts. Therefore, in such a situation the ratio decided in CIT v. Ruby Traders and Exporters Ltd. and Hindusthan Tea Trading Co. Ltd. would be applicable.
We may refer to the decision cited by the respective counsel for the parties in order to deduce briefly the ratio laid down therein. At the same time, we must keep in mind that a principle of law laid down in the ratio in a decision cannot be treated to be a straight jacket formula to be applied in each case. The facts and circumstances of each case are to be weighed with and examined as to whether a particular ratio decided in a particular case could be applied. The ratio that has been laid down in the case of Ruby Traders and Exporters Ltd. and Hindusthan Tea Trading Co. Ltd. makes it clear that the explanation offered is to be examined by the Assessing Officer as to whether the explanation offered is satisfactory. In case it is found unsatisfactory, then the assessee has to be informed about the materials so collected and that it was found to be unsatisfactory, in order to enable the assessee to furnish such other materials to establish its case since the assessee was not involved in the enquiry so made under section 68 and as such the assessee deserves an opportunity of hearing to prove its own case and dispute the opinion formed by the Assessing Officer pursuant to the enquiry held by him. If in the course of such inquiry after being so informed, the assessee furnishes any further particulars or points out to any infirmity or otherwise in the opinion so formed, the Assessing Officer has to consider the same and then come to its finding.
In Ruby Traders , it was found that the floating of share was advertised in the newspaper and the share applicants had applied from different corners of the whole of India. It was not a particular group of persons and that the subscriptions were received through different banks by cheques on diverse dates from different corners of India and all the formalities of public issue were proved to be complied with. In some cases the income-tax file numbers were furnished. In such a case the principle of further opportunity was considered. Inasmuch as the materials so disclosed were sufficient to enable a reasonable man to hold one or the other way. In such a case the opportunity was contemplated. It was not a case where a reasonable man could form one opinion only or would be unable to form the particular opinion arrived at by the Assessing Officer. But in a case where the Assessing Officer appears to be wholly improbable and no reasonable man could believe the facts disclosed the principle laid down in those two decisions would not be applicable.
The question is a question of establishment of the identity of the subscribers, which, in this case, has since been established. The next point is the creditworthiness of the investors and the last one is with regard to the establishment of the genuineness of the transaction.
Having regard to the principles laid down in the said three decisions relied upon by learned counsel for the parties, let us now examine the facts and circumstances of the present case and find out as to whether the Assessing Officer and the learned Tribunal was right or not.
In the present case in order to establish the credit-worthiness, it was shown that the bank account was opened through which the money was invested and that Form No. 4A was submitted. There was nothing on record to show that any income-tax file number was ever disclosed. The assessee had also not attempted to disclose any income-tax file number either before the learned Tribunal or before this court. Through Form No. 4A a sum of Rs. 1,400 was deposited as income-tax. Whereas in the course of deposition, the applicants A had stated that their respective annual income was between Rs. 8,000 and Rs. 10,000. They had also disclosed that they had very negligible quantum of agricultural land. Apart from the agricultural land, they did not disclose that they had any other source of income or business. They grew potatoes, which they used to keep in the cold storage of the assessee. Thus, it appears that on B the examination the applicants disclosed that they were all farmers growing potatoes and used to keep the same in the cold storage of the assessee having no other source of income or business.
On these materials, no one can form an opinion that these applicants had any income exigible to income-tax under the 1961 Act. Since they did not have any other source of income or business, the income derived from agricultural land by growing potatoes would be income derived from agriculture outside the scope of the Income-tax Act. Section 10(1) of the 1961 Act excludes the application of the 1961 Act in respect of income derived from agriculture. Therefore, filing of Form No, 4A and payment of income-tax of Rs. 1,400 seem to be wholly uncalled for and it was not explained as to why these investors, who are farmers deriving income from agriculture, earning Rs. 8,000 to Rs. 10,000 a year, were advised to pay income-tax when under the Income-tax Act the exempted income was more than Rs. 10,000 (Rs. 35,000) in respect of the assessment year 1996-97.
The huge amount of money invested by these farmers, as rightly contended by Mr. Shome, could not be believed to have been kept at home for being invested in the share capital at a later point of time. No reasonable man could believe that a person earning Rs. 8,000 to Rs. 10,000 could accumulate after meeting his normal expenses such huge amount at home without investing the amount. At the present market rate, it is just not possible for such persons to save such amount, which would accumulate the huge amount. It is not known as to what length of period was required to accumulate such huge amount after meeting the expenses for the necessities of life out of this income of Rs. 8,000 to Rs. 10,000 a year by a person having small quantity of agricultural land without any other source of income or business and when no further information with regard to the income-tax files were forthcoming. Filing of Form No. 4A on that particular previous year would not be material when no other income was disclosed by the persons, who had appeared. If the asses-see was in possession of some other material, the assessee could have obtained leave to disclose such other materials either before the appellate authority or before the Tribunal or even before us. Therefore, on the basis of the materials produced, it was just not possible for a reasonable man to form an opinion with regard to the creditworthiness of the investors. All the bank accounts were also opened on the same single day for utilising the amount for purchasing all the demand drafts on the same day out of the amounts deposited. Therefore, there was no material to show that these amounts were held by the respective investors to prove their creditworthiness. Giving of opportunity in such a case would be an empty formality.
The aforesaid two cases (supra) are completely different in factual context and have no manner of application in this case and on the admitted position as found on enquiry by the Assessing Officer.
Now turning to the question of genuineness of the transaction. The assessee had disclosed the bank account number and the investment through demand drafts. It appears that the bank accounts were opened in a particular branch of a particular bank on the same single day by each of the 40 investors. Each of the 40 investors had withdrawn the amount deposited in the bank account on the same day the accounts were for the purpose of purchasing the demand drafts. These demand drafts bear successive serial numbers continuously in order, namely, were issued in one continuous transaction. The subscribers could not produce the pass book. The counterfoil of the share scrips and minutes books were produced by the assessee. But none of the investors could produce the share scrips issued to them. Neither the assessee had requested the Assessing Officer to issue notice under section 131 or section 133 upon the investors to produce the share scrips. At the same time, when notices under section 131 were issued in order to ascertain the genuineness of the transaction, the investors were supposed to produce the share scrips to establish their claim. Inasmuch as a genuine subscriber would do so normally, since in case the genuineness of the transaction was not established, the amount would be treated as income of the assessee and the transaction having been held to be ingenuine, the investors rights may be impaired. If we read this evidence along with those to support the creditworthiness of the investors as discussed hereinbefore, it clearly shows that it was just not possible to hold by a reasonable man that the transaction was a genuine one. In this case, all the investors hail from the same area. They were farmers who used to keep the potatoes grown by them in the cold storage of the assessee. It was not very difficult for such small farmers having small means to be influenced by the assessee in view of their relation to induce them for lending their names for investing the capital through them. This does not seem to be much improbable and there is likelihood of forming an opinion in this regard one way or the other. If the opinion is formed one way or the other, even if the court is of the view that it should have been formed the other or the one way, even then this court can not interfere until it comes to the conclusion that such an opinion could not be formed at all by any reasonable man and thus the opinion so formed is perverse. Having regard to the materials produced, we do not find that such an opinion could not be formed by a reasonable man. The opinion so formed, therefore does not seem to be perverse. In these circumstances, we do not find that the ratio decided in any of the A decisions cited could be applied in this case. The giving of opportunity would be dependent on the materials placed before the Assessing Officer when there is scope for forming two opinions in respect of the materials so produced and the materials are not such which would prevent a reasonable man from forming an opinion other than that which the Assessing Officer has formed, In these circumstances, the question is answered in favour of the Department and against the assessee. The appeal, therefore, fails and is accordingly dismissed.
D.K. SETH J.-I had the privilege of going through the judgment of my learned Brother, Sinha J. I fully agree and concur with the view taken. However, I would like to add a few words of mine.
Section 68 of the Income-tax Act, 1961, confers an extraordinary power upon the Assessing Officer to treat any entry found credited in the books of account of the assessee in the previous year as income of the assessee, if the assessee offers no explanation about the nature and source of such entry or the explanation offered by him, in the opinion of the Assessing Officer, is not satisfactory. There is an inbuilt safeguard in the section itself to protect the interest of the assessee in the form of offering of explanation. We had occasion to deal with this principle in Hindusthan Tea Trading Co. Ltd. v. CIT and CIT v. Ruby Traders and Exporters Ltd. . The principle laid down therein was sought to be attracted in the present case by learned counsel for the appellant. True, such principle is attracted in a case within the scope and ambit of section 68. But the application of a ratio is dependent on the facts of each case. There must be sufficient material, i.e., evidence to attract the principles laid down in the ratio. It is the evidentiary value of the materials produced, which would be the determining factor. We may remind ourselves that though the entries made in the books of account kept in regular course of business, are admissible as relevant evidence as is provided in the first part of section 34 of the Indian Evidence Act, 1872, yet the second part makes it clear about the evidentiary value of such entry by circumscribing the scope that an entry made therein shall not alone be sufficient evidence to charge any person with liability. Thus, it appears that section 34 speaks of relevancy and relevancy alone while keeping the evidentiary value dependent on some other proof. It was so laid down in Central Bureau of Investigation v. V. C. Shukla . There seems to be no conflict between the effect of section 34 of the Evidence Act and section 68 of the Income-tax Act. Section 68 essentially contains a deeming provision when the assessee's explanation, in the opinion of the Assessing Officer, is unsatisfactory.
It is a settled proposition of law that the assessee has a legal obligation to explain the nature and source of such credit as was held in Sreelekha Banerjee v. CIT . In order to prove that the transaction is not hit by section 68, the assessee has to establish, first the identity, second the creditworthiness of the creditor and third the genuineness of the transaction. Only when these three ingredients are established, prima facie the onus shifts on the Department. Mere establishing of the identity of the creditor would not be enough ; neither proof of creditworthiness would be sufficient ; all the three ingredients are to be established. This view was taken by our High Court in Shankar Industries v. CIT and continuously took a consistent view all through in several subsequent decisions ; and even in CIT v. Precision Finance Pvt. Ltd. , wherein it was also held that mere furnishing of the particulars is not enough ; mere payment by account payee cheque is not sacrosanct, nor can it make a non-genuine transaction genuine. The creditor should be identified; his creditworthiness and the genuineness of the transaction should be proved, as was held in CIT v. Korlay Trading Co. Ltd. . When these ingredients are established, the onus shifts on the Department. The onus is stated to be shifted only when there is evidence to sufficiently establish a prima facie case in favour of the party on whom the onus lies. Lord Hansworth M. R. in Stoney v. Eastbourne R. D. Council [1927] 1 Ch. 367 at page 397 (CA) observed : ". . . there can only be sufficient evidence to shift the onus from one side to the other if the evidence is sufficient prima facie to establish the case of the party on whom the onus lies. It is not merely a question of weighing feathers on the one side or the other, and on saying that if there were two feathers on one side and one on the other that would be sufficient to shift the onus. What is meant is, that in the first instance, the party on whom the onus lies must prove his case sufficiently to justify a judgment in his favour if there is no other evidence."
In Ruby Traders and Exporters Ltd. cited by Mr. Dutta, we had occasion to deal with a case where the subscription to the share capital was made through cheques. In that case, except furnishing the list of the subscribers, no attempt was made to establish the identity of the subscribers neither there was any attempt on the part of the assessee to prove the creditworthiness of the subscribers. In that case, we held that simply because the payment was made by cheque, it would not be concluded that section 68 would not be attracted and that the Assessing Officer could not examine the case. The Assessing Officer, on the other hand, had to find out as to whether on those materials the assessee was able to establish the ingredients necessary to obviate the mischief of section 68. A sum entered into the books of account was the subject-matter on which section 68 could be applied if the entry remains unexplained. On the materials in Ruby Traders and Exporters Ltd. there was no scope for giving any further opportunity as in the present case. Whereas in CIT v. Kundan Investment Ltd. , on the facts, it was found that there was some failure on the part of the Assessing Officer in dealing with the question for which/ with regard to limited items, opportunity was given to the assessee. In Kundan Investment Ltd. , we had occasion to hold that the materials having been found insufficient, the onus shifted from the Revenue to the assessee when it was so communicated. In the absence of any further materials furnished by the asses-see, it was not possible to establish -the identity of the subscribers or their creditworthiness. The Revenue could do no further except communicating the same to the assessee. It was incumbent on the assessee to establish the identity and prove the creditworthiness of the subscribers. Unless the onus was discharged, there was no scope for ascertaining the genuineness of the transaction. In that decision, we had occasion to conclude that the finding of the learned Tribunal as well as that of the Commissioner of Income-tax (Appeals) with regard to the particular questions was perverse. There being unexplained discrepancy in the confirmatory letter and the same having not been clarified in the order of the learned Tribunal, the court felt the necessity of remitting the case in respect of the particular persons to the learned Tribunal for taking a decision on the basis of the materials. Relying on Hindusthan Tea Trading Co. Ltd. , we had allowed opportunity to the assessee in that case to prove its case before the Assessing Officer for returning the findings to the learned Tribunal in order to enable the learned Tribunal to decide the case accordingly. Therefore, the decisions in Ruby Traders and Exporters Ltd. ; Kundan Investment Ltd. and Hindusthan Tea Trading Co. Ltd. did not lay down an absolute proposition of giving of an opportunity. It is dependent on the facts of each case.
In Hindusthan Tea Trading Co. Ltd. ; Kundan Investment Ltd. and Ruby Traders as discussed above, we had occasion to deal with this question of shifting of onus where we had occasion to hold that after the materials received on the basis of the disclosure by the assessee and when the Assessing Officer forms an opinion that the explanations given is unsatisfactory, the Assessing Officer has an obligation to inform the assessee about the opinion in order to enable him to rebut the formulation of the opinion. This principle has a universal application in all such cases where the three ingredients, as stated above, appear to have been prima facie established. If on the face of the materials that were made available before the Assessing Officer fails even to prima facie make out a case for establishing one or the other of the ingredients, then this principle would not be attracted. Brother Sinha J., had very rightly and elaborately dealt with the same in his judgment. I would only like to add that the test is that in order to apply the said principle on the materials produced, there should be some joints to play, namely, where on the materials two opinions are possible or it appears prima facie that the explanation given, if un-rebutted, would seem to be sufficient or satisfactory, the principles of Hindus-than Tea Trading Co. Ltd. ; Kundan Investment Ltd. and Ruby Traders have to be applied ; but where the materials are such that no second opinion is possible even prima facie, the giving of opportunity would be an empty formality, these principles cannot have any joints to play. This is again dependent on the facts of each case and the Assessing Officer has to examine the facts and evidences produced before him and record reasons in the order supporting the departure from the principle laid down in Hindusthan Tea Trading Co. Ltd. and Ruby Traders . Giving of opportunity as laid down in the said two decisions is the rule, denial thereof or departure therefrom would be an exception. The exception must, therefore, be supported by sufficient and cogent reasons.
Applying the above test in the present case, it appears that there cannot be any two opinions, having regard to the materials produced with regard to the creditworthiness of the subscribers as well as to the question of genuineness of the transaction, though their identity was established as has been held by Brother Sinha J., supported by elaborate reasons given in the judgment which I had the privilege of going through; and I do take the opportunity of expressing my concurrence and confirmation of the view taken by my learned Brother.