Calcutta High Court
Balurghat Transport Co. Itd. vs Assi Tant Commissioner Of Income Ta on 30 April, 1998
Equivalent citations: (1999)63TTJ(CAL)302
ORDER
BY THE BENCH:
This is an appeal arising out of the block assessment order passed by the Asstt. CIT, Central Circle-VII, Ca/cutta under s. 158BC of the IT Act, 1961.
2. Two additions are in dispute before us. First issue pertains to the addition of Rs. 3 crores towards undisclosed income of the block period referable to the asst. yr. 1995-96 on the ground that the shares contributed by 4 Sapphire Group of companies in the assessee- company are not satisfactorily explained as regards the genuineness and creditworthiness of the shareholders. In other words, the addition was made under s. 68 of the IT Act on the ground that the subscription amount received from the four companies towards promoters quota is actually the undisclosed income of the assessee- company. The second issue pertains to the addition of Rs. 2,50,000 under s. 69C of the Act.
3. The facts leading to the first issue are as under. The assessee- company was incorporated on 30th June, 1993. Prior to its incorporation, a registered firm was carrying on the same business which was now converted into public limited company. The company was set up with the authorised capital of Rs. 30 crores. It offered for public issue shares worth Rs. 11.4 crores and Rs. 3.8 crores value of shares were issued through promoters quota.
4. It is the case of the assessee- company that 4 Sapphire Group of companies, i.e., Sapphire Consultants (P) ITD., Sapphire Fashions (P) ITD., Sapphire Industries (P) ITD. and Sapphire International (P) ITD. have invested Rs. 75 lakhs each in the assessee- company by making application for allotment of shares. According to the assessee- company, share were allotted to the aforesaid four companies and the sources of investment in the cases of these four companies were subscription from several other companies in those four companies.
5. A search was conducted under s. 132(2) of the Act on 21st Nov., 1995, at the registered office of the assessee- company at 170/2C, A.J.C. Bose Road, Ca/cutta, and its various branches and the said search is said to have been concluded only on 17th June, 1996. Certain documents, shares, etc., were seized. Subsequent to the search and seizure proceedings a notice under s. 158BC was issued on 15th Feb., 1996. The assessee- company filed its return of income for the block period on 21st June, 1996, showing the undisclosed income at 'Nil'. Gandhi, A.C.A. appeared along with G.R. Sethia, an employee of the assessee from time to time and the case was discussed with them. The reasons given by the AO in making the addition of Rs. 3 crores were as under.
6. During the course of search, a Memorandum of Understanding between Rajendra Sethia, President (Corporate) of the assessee- company and one K.C. Dujari, dt. 26th April, 1994, was found which indicates that four Sapphire group of companies, mentioned hereinabove, were floated by Sethia group with an understanding that those companies would subscribe to the assessee- company. It was also inferred by the AO that the MOU indicates that Sethia group has introduced its unaccounted funds in the assessee- company in the guise of share capital contribution by those four companies. A statement under s. 132(4) was obtained from Rajendra Sethia who admitted that the undisclosed income of Sethia group of companies would be to the tune of Rs. 4.3 crores and it was further stated that the bifurcation as to the disclosure in the hands of each individual, firm, company, etc., would be submitted later. The AO issued a questionnaire on 12th April, 1996, to Rajendra Sethia asking him to explain various points relevant to the assessment proceedings of the group, in response to which Rajendra Sethia filed a letter dt. 4th June, 1996 retracting his earlier statement as to the admission of undisclosed income. Rajendra Sethia submitted that "it was not possible at that time on my part or on the part of the person concerned with the said document to find out the correctness about the matter and its up-to-date position. The said paper in question is in Hindi and I have rendered English translation, which is enclosed herewith (Annexure-I). It will be apparent from the reading of the said paper that there was an oral discussion with one K.C. Dujari and the matter was noted". In paras 2.2 and 2.3 of his reply, he further stated as under :
"2,2. Balurghat Transport Co. ITD. was coming out with a public issue and there was promoters contribution fixed at Rs. 3.80 crores. It was not possible at that time to raise the entire contribution only from own resources of friends and relatives. With K.C. Dujari the matter was discussed and he informed that it was difficult to obtain the contribution to promoters quota, because of the lockin-period of 5 years. It was his advice that he can get suitable contribution to our other companies' share capital so that those companies would ultimately make investment in shares of the Balurghat Transport Co. ITD. under the promoters quota. He undertook to arrange from his own resources contribution to share capital. It was then agreed that the share capital contribution by or through K.C. Dujari would be purchased by us at a premium of Rs. 2.50 to Rs. 3.00 per share in December, 1995.
2.3. Accordingly, what we did was that we incorporated four companies, viz., Sapphire Consultants (P) ITD., Sapphire Industrial (P) ITD., Sapphire International (P) ITD., Sapphire Fashions (P) ITD. and through Mr. Dujari, we got sufficient contributions to the share capital of those four companies which in turn contributed to the share capital of Balurghat Transport Co. ITD. It is necessary to state that these four companies were duly incorporated under the provisions of the Companies Act and relevant Memorandum and Articles of Association of these companies are enclosed. We are also enclosing herewith the list of share-holders of those four companies along with their income-tax particulars (Annexure-II). It may be necessary to state that the investment by these companies to our group companies are fully recorded, made through A/c payee cheques and reflected in balance sheets of the shareholding companies which are duly assessed to tax. As because Mr. Dujari could not fulfil his commitments regarding other matters of the understanding such as income-tax assessments of the four companies, etc., we have, not discharged our commitment of buying the shares of the said four companies. Therefore, to sum tip, it is submitted that the share capital contributions to the four companies is duly evidenced and cannot be referred to as out of unaccounted funds."
7. The AO observed that the correct English translation of the MOU reads that the share of those four companies were agreed to be transferred at Rs. 2.50 to Rs. 3.00 per share to a quoted company. The quoted company would be under the control of Sethia family. The AO was of the opinion that the MOU and the subsequent developments such as formation of the four companies, etc., would clearly indicate that these companies were only front companies so as to benefit the Balurghat group. On the basis of the information available on record and the material gathered from time to time, AO proceeded to examine the shareholders of the assessee- company (4 Sapphire group of companies). The four companies have also filed returns before the same AO who is incharge of the assessee- company. The AO found from the records that the substantial portion of share capital of these four companies was subscribed by about 15 companies. Their share capital, in turn, has mostly come from one Kherrika & Co. The AO contacted pgncerned As to find out the existence of those companies. The concerned AO replied that those companies were not in existence, inasmuch as notice could not be served. The AO also examined the bank accounts of those companies and issued notices to Kherrika & Co. (proprietor A.K. Khernka) who did not appear before the AO. Certain noticeable features in the examination made by the AO were :
(a) Group of two or more than two companies were incorporated on the same date and all of them having the same address;
(b) These companies could not be traced; and Majority of the directors/promoters were common in all those cases.
8. All the information so gathered was put to Rajendra Sethia. He submitted that the statement, given under s. 132(4) of the Act is obtained when he was in a confused state of mind and the circumstances were such that he had no other alternative but to purchase peace with the Department by offering huge amount as undisclosed income, as per the direction of the Departmental authorities. It was further submitted that the four companies were in existence and the sources of sources were also proved by the assessee and, hence, addition of Rs. 3 crores is not maintainable in the hands of the assesseecompany. However, the AO did not find the explanation of the assessee satisfactory in the light of the material collected by him. In making the addition of Rs. 3 crores, he observed as under :
(a) 4 Sapphire companies made investments of Rs. 75 lakhs each as share application money under promoter's quota of Balurghat Transport Co. ITD. I.
(b) 15 companies made investments of 3.04 crores on account of share application money in the four companies;
(c) The entire fund of Rs. 3.04 crores of these companies came from the bank account of Khernka & Co.;
(d) Summons under s, 131 were sent to Mr. Khemka but he did not produce evidence nor did he communicate as to why he did not comply with the summons"
(e) From the bank accounts it could be seen that in the bank account of Khemka & Co. there are cash deposits and deposits by transfer. Due to non-compliance on the part of Khemka & Co., the source of deposit could not be verified.
(f) It is thus seen that the entire sum of Rs. 3.04 crores, which has been contributed by 15 companies to the share capital account of 4 Sapphire group companies came from Khemka & Co., which in turn, from the huge cash deposits in the bank account of Khemka & Co.;
(g) 15 companies are not traceable nor are the directors thereof. Even the auditors are not traceable. Therefore, the identity, creditworthiness and genuineness of the investments made by them in the share capital of Sapphire companies are not proved. Sapphire companies did not have any other source of fund at the relevant time. Such being the position, Sapphire companies' investment in the promoters quota of Balurghat Transport Co. ITD. in respect of 30 lakhs shares involving investment of Rs. 3 crores is not proved. -
(h) It was submitted that some of the companies, out of the above mentioned 15 companies, were amalgamated with Peacock Traders and Exporters ITD. of 28, Green Lane, Ca/cutta. On enquiry, it was found that there was no premises bearing No. 28, Grant Lane, and even if it is taken as 28, Lane, there too Peacock Traders & Exporters ITD. was no traceable.,
(i) After persuasion K.C. Dujari appeared in response to the summons but he was economical with truth and refused to cross-examine Rajendra Sethia which indicates that what was stated by him was not wholly truth. He, of course, denied formation of 4 companies though Rajendra Sethia admitted that tour companies were formed, as agreed in MOU;
(j) Ralendra Sethia filed his written submission on 20th Jan., 1997, wherein it was stated that the following companies were amalgamated "(a) (a) Anushan Trading & Agencies (P) ITD.
(b) Angad Equity Services (P) ITD.
(c) Ank Equity Services (P) ITD.
(d) Aaiswary In exorts (P) ITD.
(e) Aquila Export Services (P) ITD.
were amalgamated with Peacock Traders & Exporters ITD.
(b) Ciconia Equity Services (P) ITD.
Kissmiss Agencies (P) ITD.
Midpoint Tie-up Services (P) ITD.
Zephyr Marketing (P) ITD.
were amalgamated with Cactus Software (P) ITD."
Though it is the case of Mr. Sethia that amalgamation implies that the amalgamating companies must have existed before amalgamation and that the amalgamated company does presently exist, but it has already been proved conclusively that in this case the amalgamating companies did never exist nor do the amalgamated companies.
(k) Sec. 383A of the Companies Act requires that companies having paid-up capital of Rs. 50 lakhs and above shall have a whole-time secretary. All the 15 companies have paid up capital exceeding Rs. 50 lakhs and yet have not complied with the said statutory requirement. Further, the companies had the same address on papers but neither the companies nor the directors could be traced and even the amalgamated companies Peacock Traders & Exporters ITD. and Cactus Software (P) ITD. were not traceable.
(1) In such a situation, on plea of amalgamation, Sapphire companies cannot be allowed to get away without discharging its onus to produce its shareholders. It could have produced Peacock Traders & Exporters ITD., Cactus Software (P) ITD. and others but he did not do even that because the above companies were not in existence nor are they presently in existence.
(m) Statements of Rajendra Sethia were made voluntarily and without any pressure or coercion.
(n) 4 Sapphire companies are assessed to tax in this circle. The source of the sum of Rs. 3.04 crores which includes the sum of Rs. 3 crores, recorded in the books of and subsequently credited in the bank account of the assessee in the block period relevant to the asst. yr. 1995-96, towards share application money, could not be proved.
(c) The sum of Rs. 3 crores is, therefore, liable to be treated as cash credit under s. 68 of the Act.
9. Aggrieved, assessee is in appeal before us. Learned counsel for the assessee submitted that the search was conducted on 21st Nov., 1995. A MOU was seized during the course of search. Mr. A.K. Sethia was examined who denied any knowledge of the company and the MOU. Though the AO is said to have issued a questionnaire to Rajendra Sethia, but that was not brought to the notice of the assessee and, in fact, Sethia does not come into picture in respect of the proceedings of the assessee- company as he is not a director. Learned counsel adverted our attention to p. 432 of the paper-book and submitted that Rajendra Sethia was not a director of the assessee- company. He has also furnished before us a copy of the audited balance sheet for the asst. yr. 199596. Learned counsel submitted that proceeding under s. 158BC were completed without giving the assessee reasonable opportunity of being heard, inasmuch as, the questionnaire dt. 12th April, 1996, was not issued to the assessee company and a reading of the questionnaire indicates that it was intended to be answered by Rajendra Sethia in his individual capacity, inasmuch as, the word 'you' mentioned in the said questionnaire indicates clearly that the latter was written to Rajendra Sethia. Pages 132 to 134 of the paper-book contains the order-sheet copies which does not indicate that the questionnaire or the contents therein were intimated to the persons who have appeared on behalf of the assessee- company. In the order-sheet as well as in para 3 of the assessment order it was mentioned that R. Gandhi, A.C.A. appeared along with G.R. Sethia, an employee of the assessee. In such an event of the matter, the block assessment completed by the AO without putting the material to the concerned person is in violation of principles of natural justice and, therefore, the assessment proceedings are liable to be quashed. Learned counsel for the assessee has taken us through the relevant portion of the assessment order to indicate that the material upon which the AO relied upon, were not brought to the notice of the authorised representative of the assessee- company but the discussion was with Rajendra Sethia only. Adverting to pp. 27 and 28 of the paper-book [MOU in Hindi and its translated version in English, learned counsel submitted that the MOU does not show that the assessee- company has introduced undisclosed income. The letter only indicates the discussion between Rajendra Sethia and K.C. Dujari in connection with promoters' quota shares of Balurghat Transport Co. ITD. amounting to Rs. 300 lakhs and the consequent suggestion of Mr. Dujari to form four new companies. Learned counsel further submitted that Rajendra Sethia never admitted any undisclosed income of the assessee in his statement under s. 132(4) of the Act, inasmuch as, the statement obtained was in connection with Balurghat group of companies only. It was submitted that the impugned addition cannot be made in the hands of the assessee- company, inasmuch as AO admitted that the source is from 4 Sapphire group of companies which, in turn, is from 15 companies and again, in turn, from Kherrika & Co. According to the learned counsel, the decision in the case of CIT vs. Sophia Finance ITD. (1993) 113 CTR (Del) 472 : (1973) 205 ITR 98 (Del) applies to the facts and circumstances of the case and hence, the addition should not have been made by the AO. He has also relied upon the decision of the Hon'ble Supreme Court in the case of CIT vs. Orissa Corpn. (P) ITD. (1986) 52 CTR (SQ) 138 ' - (1986) 159 ITR 78 (SC) in support of his submission that the assessee having discharged its onus of proving the creditworthiness and in the absence of conducting proper enquires by the AO no addition can be made. In respect of the submission that the assessee- company was not aware of any enquiry conducted by the AO inasmuch as it was not put to the assessee and hence, the later process of enquiry and the consequent assessment was in violation of principles of natural justice, he relied upon the following decisions :
(a) Kishinchand Chellaram vs. CIT (1980) 19 CTR (SQ) 360 : (1980) 125 ITR 713 (S0);
(b) Kalra Glue Factory vs. Sales-tax 7Yibunal (1987) 65 CTR (SC) 233 : (1987) 167 ITR 498 (SQ. and
(c) R.B. Shreeram Durga Prasad & Fatechand Nursing Das vs. Settlement Commission (1989) 75 CTR (SQ) 187: (1989) 176 ITR 169 (SQ).
He also submitted that the tax is payable on the income earned by the assessee and it cannot be the basis upon the admission made by the assessee or its counsel and further submitted that such admission is neither binding nor final if it is proved that the admission is not in accordance with facts. In this regard he relied upon the following decisions :
(a) Karam Chand Thapar & Bros. (P) ITD. vs. CIT (1971) 82 ITR 899 (SQ).
(b) Pullangode Rubber Produce Co. ITD. vs. State of Kerala 1972 CTR (SQ) 253 (1972) 91 ITR 18 (SC); and
(c) Satinder Kumar (HUF) vs. CIT 1976 CTR (HP) 335: (1976) 106 TTR 64 (HP).
He has also relied upon the reply of Rajendra Sethia dt. 18th Jan., 1997, (pp. 77 to 79 of the paper-book) to highlight the reasons which prompted Rajendra Sethia to admit undisclosed income to the extent of Rs. 4.3 crores. He submitted that the admission was only to avoid further harassment. Explaining further he submitted under s. 132(9A) of the Act, the AO is duty-bound to return all seized material within 15 days but the AO has retained the documents even beyond that period without any valid reason and since Rajendra Sethia was not aware of the contents of the seized document/ material, he was compelled to make such statement under s. 132(4) of the Act. Adverting our attention to p. 313 of the paper-book (reply dt. 4th June, 1996, by Rajendra Sethia), the learned counsel submitted that the undisclosed income of the Sethia group would be only Rs. 1.3 crore as against Rs. 4.3 crores admitted earlier. He lastly submitted that in the block assessment, the AO has to confine himself to the material available on record and he should not make roving enquiries so as to make the addition, in view of the spirit of the special scheme introduced under Chapter XIV-13 of the IT Act. He further submitted that even in regular assessment, such addition cannot be justified, in view of the fact that the assessee has proved the source of the fund.
10. On the other hand, learned Departmental Representative submitted that the -earch commenced on 21st Nov., 1995, and completed on 17th Jan., 1996.
During the course of search, i.e., on 17th Jan., 1996, Rajendra Sethia admitted the undisclosed income in his statement under s. 132(4) of the Act. The statement was retracted after long gap of time which is not permissible in view of the fact that the earlier statement was without any coercion. In this regard, he relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Manharlal Kasturchand Chokshi vs. Asstt. CIT (1997) 61 ITD 55 (Ahd). The learned Departmental Representative admitted that there were no entries in the order sheet as regards the questionnaire dt. 12th April, 1996, issued to Rajendra Sethia but he submitted that the questionnaire was, in fact, issued and replied by the assessee. He further submitted that address of Sapphire group of companies was the same and in the share certificates, cheque Nos. were left blank. The MOU was admittedly signed by Rajendra Sethia and K.C. Dujari and in furtherance to the understanding four companies were formed which, in turn, made investments in the assessee- company. Surrounding circumstances indicate that the MOU was acted upon and this justified the action of the AO in adding the amount of Rs. 3 crores. He further submitted that the English translation of MOU furnished by the learned counsel for the assessee did not project the correct version. He further submitted that the original document is in Hindi and the correct translation of the relevant sentence is that the shares of the four Sapphire group companies should be transferred to Sethia group @Rs. 2.50 or Rs. 3.00 per share. He thus submitted that the figures Rs. 2.5 and Rs. 3 do not indicate the premium of the shares but it indicates the sale price of one share at which it is intended to be transferred. He has also adverted our attention to para 4 of the MOU wherein the word "Hamara (we was mentioned which indicates that it is the company and not the individual who entered into an understanding with Dujari. Learned Departmental Representative has also taken us through the impugned assessment order to submit that the enquiries conducted revealed that the 15 companies, which invested in four Sapphire group of companies to the tune of Rs. 3.04 crores, were not in existence and the result of the enquiry was put to Rajendra Sethia and hence, it cannot be said that assessment was made without intimating the assessee about the enquiries caused by the AO. He further submitted that Rajendra Sethia is the President (Corporate) of the assessee- company and, hence, it cannot be said that the assessee- company was not aware of the enquiry as all the details were put to him. It is the case of the learned Departmental Representative that the enquiries conducted by the AO having been put to Rajendra Sethia and since the assessee- company is aware of the particulars, the procedure is followed by the AO 'in substance,' and merely because a notice was not directly addressed in the name of the assessee- company, the proceedings are not vitiated, in view of the provisions o, s. 292B of the IT Act, 1961. As regards the return of seized material within 15 days, learned Departmental Representative submitted that the provision of s. 132(9A) applies from the date of conclusion of such proceeding and in the instant case, search was completed only on 17th Jan., 1996. As regards applicability of s. 68 of the Act, learned Departmental Representative submitted that the assessee offered an explanation which was not to the satisfaction o, the AO in the facts and circumstances of the case and, therefore, the decision of the Full Bench of the Hon'ble Delhi High Court in the case of Sophia Finance ITD. (supra) applies to the instant case. He further submitted that in respect of the issue concerning s. 68 of the Act, the burden of proof is on the assessee and in the absence of discharging the burden to the satisfaction of the AO, the AO is justified in making the addition. He relied upon the following decisions in this regard :
(a) Sreeleklia Banerlee & Ors. vs. CIT (1963) 49 ITR 112 (SC);
(b) Northern Bengal Jute Trading Co. ITD. vs. CIT (1968) 70 ITR 407 (Cal);
(c) Roshan Di Hatti vs. CIT 1977 CTR (SQ) 200: (1977) 107 ITR 938 (SC);
(d) Chuharmal vs. CIT (1988) 70 CTR (S0 68 .. (1988) 172 ITR 250 (SQ)'.
(e) CIT vs. Precision Finance (P) ITD. (1994) 121 CTR (Cal) 20: (1994) 208 ITR 465 (Cal) -
(f) Sumati Dayal vs. CIT (1995) 125 CTR (SQ) 124: (1995) 214 ITR 801 (SC).'
(g) Kale Khan Md. Hanif vs, CIT (1963) 50 ITR 1 (SC);
(h) Asstt. CIT vs. Dhanalaxrni Steel Reroling Mills (1996) 55 TTJ (Hyd) 679 (1996) 57 ITD 361 (Hyd),.
(i) ITA No. 2031Cal/1991 dt. 3rd Jan., 1995,. and
(j) ITA No. 27891Cal11990, dt. 16th Nov., 1994.
Learned Departmental Representative further submitted that in the Income-tax proceedings the AO can peer into the whole matter if the company adopted a collusive/colourable device to avoid tax and in this regard he relied upon the following decisions :
(a) Suma ti Dayal vs. CIT (supra)
(b) Juggilal Kamlapa t vs. CIT (1969) 73 ITR 701 (SQ1.
(C) Workmen of Associated Rubber Industries ITD. vs. Associated Rubber Industries ITD. (1985) 48 CTR (SQ) 355.. (1986) 157 ITR 77 (SQ)'.
(d) McDowell & Co. ITD. vs. CTO (1985) 47 CTR (SQ) 126 : (1985) 154 ITR 148 (S0;
(e) CIT vs. Smt. Mnal Ramesh Chand (1987) 61 CTR (Guj) 80 : (1987) 167 ITR 507 (Gul); and
(f) M.D. Jindal vs. CIT (1987) 59 CTR (Cal) 78: (1987) 164 1TR 28 (Cal).
To justify the addition made the AO on the ground that when best possible information is not available, assessment has to be made on the basis of available information, he relied upon the decision of the Hon'ble Madras High Court in the case of CIT vs. Krishnaveni Ammal (1984) 38 CTR (Mad) 331 . (1986) 153 ITR 826 (Mad).
11. Joining the issue, learned counsel for the assessee submitted that Rajendra Sethia did not represent the company at any point of time and as could be seen from the order-sheet entry, the addition was based only on MOU and thus the addition was made on surmises without sufficient material. He further submitted that search was concluded on 11th Dec., 1995, itself and the 15 days for return of documents commences from the said date. In this regard he has taken us through Panchanama (pp. 339 to 379 of the paper-book). He submitted that search proceedings having been completed on 1 Ith Dec., 1995, the statement obtained from Rajendra Sethia on 17th Jan., 1996, cannot be considered as a statement under s. 132(4) of the Act. He further submitted that under s. 158BA of the Act, the words 'undisclosed income' are defined and looking to the scope of the special scheme, as considered by the Mumbai Bench of the Tribunal in the case of Sunder Agencies v. Dy. CIT (1997) 63 ITD 245 (Mumbai), there is no scope for making presumptive addition.
12. We have carefully considered the rival submissions and perused the records and have also considered the legal position. The immediate impression that we have in our mind is that there is no justification for making an addition in the assessment of this assessee- company. It is an admitted fact on the basis of investigation carried out that the ultimate source of the funds invested in the share capital by the four companies of the Sapphire group came from the bank account of Mr. Khemika. Mr. Khemika is the 4th entity in whose bank account the funds was traced. The bank account is genuine one, but only thing is that Mr. Khemika did not appear before the AO. There is no finding on the basis of any material that Mr. Khemka is a non-existent person or was benami of the assessee- company and in all likelihood he could not be considered benami of any other person. In any case, we are concerned with the first entity which has received the funds by way of subscription to the share capital from four companies which too are assessed to tax. And these four companies received the funds from another 15 companies, again different entities. The 2nd entity of the four companies are assessed by the same AO assessing the assessee company. Therefore, it has to be held that the onus by the assessee is discharged. In fact, it is proved on the basis of the investigation carried out that the funds belonged to Mr. Khemka, the 4th entity as the same were routed through the bank account of Mr. Khemka. The AO left the investigation halfway without bringing on record any material which could link the money deposited in Mr. Khemka's bank account with moneys belonging to the assessee- company. Once the assessee is able to establish that it has, in fact, received moneys from another entity, the assessee cannot be burdened with a further onus of establishing the source from which 3rd entity, had been able to obtain the moneys, as was held in the case of CIT vs. Daulat Ram Rawatinull 1972 CTR (SQ) 411 .. (1973) 87 ITR 349 (SQ). It may be stated here that language of s. 68 uses the word "may" and not "shall" and in case the explanation is not satisfactory, thus giving an authority to the AO a power to assess any 3rd person, in case it is found the sum credited in bank account belonged to the said 3rd person and not to the assessee. Therefore, the fact that the explanation offered by the assessee, if not satisfactory, should not invariably force the AO to treat the cash credit as income of the assessee. It is not denied that the four companies which subscribed to the share capital of the assessee are being assessed by the same AO. In our opinion, the onus lay upon the assessee is fully discharged and no addition is called for.
13. Scheme of provisions contained in s. 158B comprised in Chapter XIV-B of the Act is to unearth the undisclosed income of the assessee. A particular receipt representing an asset whether income has to be proved by the Revenue, as the burden is on it, on the basis of clinching evidence. That is why the taxing provision is required to be construed very strictly which again means the proof should be beyond doubt. In this case, we do not find any direct material from which only inference that can be drawn is that the undisclosed income did exist and the same belonged to the assessee. The MOU found at the time of search is only between Rajendra Sethia and Mr. Dujari and the same is also not on the letter head of the assessee- company. If at all it has to be inferred that there was a scheme to convert the black money, yet it cannot be said that this black money was of the assessee as the same was in the process of incorporation to start business. The money could be of anybody including Mr. Sethia, on basis of evidence gathered.
14. In the above context, when the burden is upon the Revenue to prove that a particular receipt is an income, somehow or the other, we do not know what role the provisions of s. 68 have to play. Because the provisions contain a fiction, that is to say a cash credit may be deemed to be taxable income if the AO is not satisfied about the explanation of assessee. The rigour of s. 68 has to be read in context of the settled law by the Supreme Court in the case of Parimisetti Seetharamamma vs. CIT (1965) 57 ITR 532 (SC) that the burden is upon Revenue to prove that a particular receipt is taxable income. Moreover, it is not always the case that even when provisions of s. 68 are sought to be applied and the AO is of the opinion that the cash credit is not satisfactorily explained, the same has to be treated as deemed income. The language used in the section says even if the AO is not satisfied yet the cash credit may to deemed to be the taxable income. The word used is "may" and, therefore, again requires judicial appreciation of the evidence before coming to the conclusion whether the cash credit be treated as deemed income or not.
15. It is said that four shareholder companies are assessed separately. 15 persons contributed the share capital of the four companies and ultimately it was found on investigation that moneys came from the account of Khernka & Co. There is no further investigation or material gathered on the basis of which an inference can be drawn that the assessee was, in any way, connected with Khernka & Co. and further the deposits in the bank account in the name of Kherrika & Co. came from the funds belonging to the assessee. In this context the ratio laid down by the jurisdictional High Court in the case of CIT vs. Active Traders (P) ITD. (1993) 115 CTR (Cal) 69: (1995) 214 ITR 583 (Cal) is also required to be considered where on similar issue with regard to share capital, it was observed that there has to be linkage between the funds deposited and the funds belonging to the assessee. In the absence of linkage, it was observed by Their Lordships that provisions of s. 68 would not apply.
16. Mr. Rajendra Sethia may be one of the associate persons of the group assessees, but he is nobody as far as the assessee is concerned in the eye of law. If he is having some implied authority on the basis of which he has some say in the matters of the assessee- company, then equally he has similar authority and can be said to be wielding the same power as far as the affairs of the group assessees are concerned. Why then pick up this particular assessee company merely because amounts are recorded in its books of accounts. It is not denied that the amounts are received from four companies which are legally incorporated and separately assessed to tax. They are identifiable and capacity is not denied on the basis of cogent material. The source is proved by the assessee and in our opinion, the assessee cannot further be asked to prove source of the source and that too when deeming provisions are involved and again that too in the context of unearthing the undisclosed income of the assessee.
17. Some importance is given to the fact that Mr. Rajendra Sethia was representing in the assessment proceedings and the assessee never raised any objection in this regard. This fact is sought to be taken as going against the assessee. In our opinion, there can be another angle to look at this fact. If in reality funds were arranged by Mr. Rajendra Sethia, then obviously the assessee- company would hold Mr. Sethia responsible and it would be Mr. Sethia who would undertake to ensure that the assessee- company is not unjustifiably taxed on the funds arranged by him and, therefore, in the assessment proceedings certainly the assessee- company would allow him to represent and no objection would be raised. This aspect goes in favour of the assessee, It has to be remembered that prior to the incorporation of the company on 30th June, 1993, a partnership firm was carrying on same business which is now taken over by public limited company. Mr. Rajendra Sethia's admission, which is subsequently retracted, only states that unaccounted money of the Sethia group would be around Rs. 4.3 crores and bifurcation of this in various entities in cases of individual, partnership firm, corporate bodies, etc., shall be submitted later on. According to us, this statement does not suggest that any part of undisclosed money belonged to the assessee- company and even if adverse inference is to be drawn, then amount of capital has to be assessed in the hands of persons who invested their black money in this company, through 4 companies which are admittedly assessed as different entities. Further, the finding of the AO that the directors and auditors of 15 companies are not traceable is only on the basis that notices sent by respective A0s could not be served upon them. In our opinion, this aspect alone cannot prove that the 15 companies are not in existence without there being any verification of the records with the Registrar of Companies, etc. 17.1. If the amount is added here, then what happens in the assessments of the four companies' shareholders who claimed ownership of the shares and their directors are admittedly not absconding.
17.2 The learned Departmental Representative's argument that surrounding circumstances indicated that MOU was acted upon again, in our opinion, is not conclusive and decisive for addition to be made in assessment of the assessee company as the same is distinct from Rajendra Sethia. Further, there cannot be any dispute that AO can pear the veil if the company accepted colourable device to avoid the tax. But the question here is who adopted the colourable device ? Certainly not the assessee which came into existence only on 30th June, 1993, and prior to incorporation, the same business was carried on by a partnership firm through its partners and all are different entities from tax point of view. MOU is not signed by the company. Four companies which are shareholders are separate legal entities, etc., and ultimately it is found that moneys came from Kherrika & Co. All these surrounding and attending circumstances indicate that moneys did not belong to the assessee and further, it did not even belong to its shareholders. All the conditions to discharge initial onus is discharged by the assessee. AO left the enquiry half-way and did not find out actually who deposited amounts in the bank account of Khernka & Co. The learned counsel, therefore, rightly relied upon the judgment of the apex Court in the case of Orissa Cement Corporation. (supra).
18. On the alternative ground of the assessee regarding lack of opportunity to rebut the findings on the basis of material gathered by the AO but not put to the assessee, we would observe that the importance of following principles of natural justice in making an assessment cannot be undermined. Procedure is not certainly a matter of secondary importance. In fact, the administration and quasi-judicial functions of an executive can be properly checked only by procedural fairness. The principle of giving an opportunity before using the material gathered adversely is now incorporated in the statute itself and this is provided in sub-s. (3) of s. 142 which says that the assessee shall, except where the assessment is made under s. 144, be given an opportunity of being heard in respect of any material gathered on the basis of enquiry by the AO and proposed to be utilised for the purpose of assessment.
19. The superior Courts have time and again maintained that the principles of natural justice are not only to be followed but it should appear to have been followed. In other words, a right of hearing is not an empty formality. The person affected must know what evidence is collected by the AO to make an assessment. The AO is no doubt not fettered by technical rules of evidence. It is open to him to collect any material to facilitate assessment even by private enquiry. But, if he desires to use the material so collected, the assessee must be informed of the material so collected and must be given adequate opportunity of explaining it. It is not sufficient if the AO discloses the material to some other person who is not directly connected to the assessee- company. In other words, by disclosing the material to an unauthorised person, the AO cannot plead that in substance, the rules of natural justice were complied, by presuming that in said unauthorised person having been closely connected to the assessee, might have passed on the information to the assessee concerned.
20. In this context, it may, be appropriate to quote Lord Wright, who said [See General Medical Council vs. Spackman (1943) AC 627 at 6441 as extracted by the author Mr. H.W.R. Wade in his book on 'Administrative Law' 4th Edri., p. 454 :
"If the principles of natural justice are violated in respect of any decision, it is indeed immaterial whether the same decision would have been arrived at in the absence of the departure from the essential principles of justice. The decision must be declared to be no decision."
21. On careful consideration of the facts and circumstances of the case and in the light of the settled legal principles, we are of the opinion that, the assessment made by the AO in the instant case is illegal. However, since the main issue is decided in favour of the assessee, the alternative ground of the assessee does not have any practical significance.
22. The next issue pertains to the addition of Rs. 2,50,000. The search conducted by the Department revealed that the assessee paid Rs. 2,50,000 to 'ULFA', but the same was not accounted for 'n the books. AO added the said sum under s. 69C of the IT Act.
23. Before us, the learned authorised representative of the assessee contended that the 'ULFA' has made a demand of Rs. 2.5 lakhs from the assessee, and a receipt was thrown in the office premises though the payment was not made. He, therefore, submitted that the assessee has not incurred any expenditure and thus addition is not maintainable under s. 69C of the Act. In the alternative, learned counsel submitted that the expenditure is a kind of protection money paid to 'ULFA' so that the business of the assessee could be run smoothly and hence, the expenditure allowable as deduction under s. 37 of the Act, being wholly or exclusively incurred for the purpose of business. He further submitted that if the addition towards income from undisclosed source is confirmed, vis-a-vis ground 1 or 2, then this expenditure should be taken as having been incurred from the said undisclosed source and addition under s. 69C is liable to be cancelled even on that count. On the other hand, the learned Departmental Representative relied upon the order of the AO.
24. We have considered the rival submissions. Admittedly, a document is found during the course of search which indicates that the assessee incurred the expenditure. The statement of the learned authorised representative that the amount is not actually paid is a mere self-serving statement on the facts of the case. We are, therefore, of the opinion that the expenditure was incurred and the same is required to be added. But the payment of the same being opposed to public policy, in our opinion, the same is not allowable as business expenditure, though it might have been wholly and exclusively incurred for the purpose of business. Therefore, the addition of Rs. 2,50,000 is confirmed.
25. In the result, the appeal is partly allowed.