Income Tax Appellate Tribunal - Kolkata
Sencorp India Ltd. vs Assistant Commissioner Of Income-Tax on 30 October, 1992
Equivalent citations: [1993]44ITD652(KOL)
ORDER
D.S. Meenakshisundaram, Judicial Member
1. The only point of dispute in this appeal is whether the CIT (Appeals) was justified in sustaining an addition of Rs. 17,87,500 as the income of the appellant-company from undisclosed sources.
2. This appeal arises out of the Income-tax assessment of M/s. Sencorp India Ltd., the appellant herein. The assessment year involved is 1987-88 for which the previous year ended on 30-6-1986. While completing the assessment of the appellant-company for this year on 2-3-1990 under Section 143(3) of the Income-tax Act, 1961, the Assessing Officer added back a sum of Rs. 53,62,500 as the income of the appellant from undisclosed sources. According to him, the appellant-company introduced this amount as advances and loans, that the departmental enquiries revealed that investment companies in certain cases were utilised as a device to introduce the concealed income and that none of the share applicants to whom summonses were issued by him were produced by the assessee nor their sources for investment were proved. In other words, the AO held that the nature and source of the investment introduced in different names remained unapproved. He further held that the managing director and some of the shareholders of the company were staying in Bombay and it was not possible to make any enquiry in respect of them. However, by giving a credit for 25%, he treated the balance 75% of the share capital amount of Rs. 71,50,000 received by the assessee, as the income of the assessee from undisclosed sources.
3. The assessee appealed objecting inter alia to this addition and contended before the CIT (A) that the said addition was not justified as it was not an investment company as assumed by the AO but a manufacturing company and that it had placed all the materials that were within its power and control before the AO to prove the genuineness of the subscriptions received by it through its shares which were under-written by M/s. D.B. & Co., the authorised share broker of Calcutta Stock Exchange and that the entire addition made by the AO was based on mere suspicion.
4. The CIT (A), after perusing the facts narrated in paras 2.1 to 2.5 of his appellate order, held that it was true that the AO had summoned some of the share applicants but it was found that none of the shareholders were available at the given addresses. He further noticed that eleven shareholders had filed affidavits claiming to have purchased the shares but the AO had doubted the identity of the shareholders. He pointed out that none of these share applicants were produced before the AO and their source of investment had not been proved. He further pointed out that though the number of shareholders enquired by the AO were few in number, but at least in those few cases which he had investigated, the AO drew blank regarding their whereabouts, their identity and the creditworthiness of these shareholders. Considering all these facts the CIT (A) was of the view that while the observations and conclusion drawn by the AO could not be over-ruled in respect of identity of some of the shareholders, at the same time the arguments raised by the assessee's authorised representative could not be ruled out. He held that the appellant company was not an investment company in its ordinary sense but it is a manufacturing company. Its intention was to put up a plant with foreign collaboration for which it had received Term Loan' from Industrial Finance Corpn. of India. He further held that had it been a fictitious company it would not have enjoyed the trust of Industrial Finance Corpn. of India (IFC) as well as of a foreign company. In view of the above findings, the CIT (A) felt that it would be reasonable to disallow 10% of the total share capital of the company as the identity of the shareholders had not been established before the AO and further held that also there may be some handful of promoters and directors of the company pumping in their undisclosed incomes in the shape of a new floated company's share capital in the names of several of their nominees. Thus, out of the total addition of Rs. 53,62,500 the CIT(A) maintained only Rs. 17,87,500 being 25% of the total share capital as income from undisclosed sources and deleted the balance of the amount. Aggrieved by this order of the CIT (A) the appellant has come up in further appeal before the Tribunal.
5. Shri S.R. Das, the learned counsel for the appellant, submitted that this was the first accounting year as well as the assessment year of the appellant-company, that it was incorporated on 13-6-1985 that the appellant-company raised share capital of Rs. 71 lakhs by public subscription through private placement by means of four issues on 20-11-1985, 18-2-1986, 27-3-1986 and 26-5-1986 and adding 5,000 shares subscribed by the promoters, the total share capital raised by the assessee by issue of these shares amounted to Rs. 71,50,000. The learned counsel next pointed out that the appellant is a public limited company which was incorporated for the purpose of manufacturing all types of synthetic polyester marble tiles with foreign collaboration as prescribed in the object clause of the Memorandum of Association by the company. He argued that the appellant was not an investment company as assumed by the Assessing Officer and as rightly accepted by the CIT (Appeals). He pointed out that pursuant to its objects the appellant-company had obtained an industrial licence from the Govt. of India on 27-12-1988 and had also taken several steps for erection of civil works by acquiring land and also for the erection of the factory buildings for the manufacture of synthetic polyester marble tiles at Paithan, Dist. Aurangabad, Maharashtra and that the appellant-company had also entered into technical collaboration agreement with a French company known as M/s. MFC. He further pointed out that the appellant-company had approached the 1FC for obtaining financial assistance to the tune of Rs. 268 lakhs in terms of Term Loan' and that the IFC had further agreed to under-write the equity shares of the appellant-company to the tune of Rs. 80 lakhs and had also agreed to participate in the equity capital to the tune of Rs. 32 lakhs. He pointed out that the said IFC had already opened letter of credit to import machinery from France and that the foreign collaborator viz., the French company had also agreed to participate in the equity capital of the appellant-company and that there were nominees of the foreign collaboration and of the IFC on the Board of Directors of the appellant-company. The learned counsel argued that the facts of the case clearly established that the appellant had actually received this share capital amount of Rs. 71.5 lakhs on 380 application forms which it had received from its underwriters along with cheques in favour of the appellant-company and that the shares are also allotted to the subscribers as per their applications. It was submitted that all the applicants were also informed about the allotment of shares to them under certificate of posting and their claims were entered in the register of Members as required under Section 41 of the Companies Act. The assessee also submitted that all the cheques were received on account of the application money and were deposited in Punjab National Bank and American Express Bank who were especially appointed for the said purpose and who had maintained a separate account for this purpose. It was, therefore, argued that the departmental authorities were not justified in treating a portion of this share capital amount as representing the undisclosed income of the company particularly when the company was in the process of setting up of its factory buildings at Paithan, Dist. Aurangabad, Maharashtra. He argued that there was no basis for the estimated addition of 75 per cent that was made by the Assessing Officer much less for the estimated addition of 25 per cent as sustained by the CIT (Appeals) who in one part of his order observed that it would be reasonable to disallow only 10 per cent of the total share capital on account of inability of the assessee to prove the identity of the shareholders. The learned counsel challenged the findings of the CIT (Appeals) in paragraph 2-8 of his order as unjustified and uncalled for and submitted that the said addition retained by the CIT (Appeals) should be deleted. In support of his submissions the learned counsel relied on the decision of the Allahabad High Court in the case of Chaturbhuj & Co. v. CIT [ 1959] 36 ITR 386 wherein it has been held that the very basis of assessing an income in the hands of a person is the ownership of the amount vesting in that person, and the burden of establishing that fact from some material rests initially on the Department in case that sum is not admitted by that person to be his own income or receipt. It was further held in this decision that where money appearing in the books of account of the assessee as belonging to another person, is sought to be taxed as income of the assessee, the assessee may be required to give an explanation in respect of the entry in the accounts, but the mere rejection of the explanation given by him without a finding that the explanation is unsatisfactory or unreasonable or false, does not provide any material for an inference or finding that the money belongs to the assessee and not to the person to whom it purports to belong according to the entry in the books of account.
6. Sri B. Biswas, the learned departmental representative opposed these contentions of the learned counsel for the assessee and submitted that a perusal of the assessment order would show that the Assessing Officer had made genuine efforts to verify the genuineness of the subscriptions said to have been received by the assessee from 25 persons, that in respect of the first 13, there was no evidence brought in by the assessee to rebut the result of the enquiry made by the ITO through his inspector and that in respect of the remaining 12 the assessee contented itself by filing affidavits from eleven persons but did not produce any of them. The learned dept. representative pointed out that the assessee had not established either the identity of these applicants or their sources or resources or their creditworthiness to prove that they had really subscribed to the shares applied for by them. He submitted that in the absence of any such materials placed by the assessee, the departmental authorities were entitled to question the genuineness of the share capital amounts received by the assessee and treat a portion as representing the undisclosed income of the assessee. He argued that the mere fact that the appellant is a company no sanctity need be attached from that fact alone. He contended that even the amounts received as share application money should pass the test of Section 68 of the Act and that the decisions relied on by the assessee's learned counsel would be of no avail as it was rendered under the old Act and not under the new Act wherein Section 68 is enacted. He relied on the decision of the Madhya Pradesh High Court in the case of Banshidher Agarwal Panna v. CIT [1984] 148 ITR 523 wherein it has been held that a perusal of Sections 68 and 69 of the IT Act, 1961 would show that Section 68 applies when the sum in respect of which the explanation of the assessee is not accepted is found credited in the books of account, that in such a situation the sum so credited is charged to income-tax as the income of the assessee of that previous year in which it is found credited in the books of account and that Section 69 applies to unexplained investments which are not recorded in the books of account. This decision follows the decisions of the Calcutta High Court in CIT v. Ashok Timber Industries [1980] 125 ITR 336 and CIT v. Orissa Steel Corpn. (P.) Ltd. [1983] 144 ITR 6621 and a decision of the Gujarat High Court in CIT v. Mansurali Valibhai Dudhani [1984] 148 ITR 526 (App.). In fact, the learned dept. representative submitted that these decisions supported the action of the Assessing Officer and that they should be followed in preference to the decisions rendered before the enactment of Section 68 of the Act.
7. We have carefully examined the submissions set out above, in the light of the materials placed before us. In the present case there is no dispute that the appellant is a public limited company which was incorporated on 13-6-1985 with the object of establishing a factory for manufacture of all types of synthetic polyester marble tiles with foreign technology and know-how especially French technology from M/s. MFC, France. This company commenced its business on 21-8-1985 when it obtained the certificate for commencement of business from the Registrar of Companies, W.B., Calcutta. Thereafter the appellant-company had raised share capital by issue of 7,10,000 shares to the public through Stock Exchange at the face value of Rs. 10 per share. There is no dispute that these shares were offered through private placement and were under-written by M/s. D.B. & Co., the authorised share broker of Calcutta Stock Exchange and that the assessee-company had received 380 application forms from the said under-writer along with cheques in favour of the appellant. There is also no dispute that the shares were allotted on the basis of share applications and that the names of these applicants appeared in the register of Members as required by Section 41 of the Companies Act. The share application money which has been received by the assessee-company by cheques have been encashed in Punjab National Bank and American Express Bank who maintained separate account for this purpose. Thus, the assessee-company had complied with all the requirements of the Company Law for the purpose of raising its share capital for carrying on its business activity. The CIT (Appeals) has accepted the factual position that the appellant-company is not an investment company in the ordinary sense and that it is a manufacturing company which intends to set up a plant with foreign collaboration and for which it had received a 'Term Loan" from IFC. The CIT (Appeals) has rightly held that if the assessee had been a fictitious company it cannot enjoy the trust of IFC as well as the foreign company viz., M/s. MFC, France. A perusal of the first annual report of the company shows that the entire issued capital of 7,15,000 equity shares of Rs. 10 each as on 30-6-1986 had been subscribed by the associates of the promoters and directors. This is clear from note No. 5 of the Notes on Accounts in Schedule 'F of the Annual Accounts. The directors' report also shows that the share capital was raised by private placement to friends and relatives of the directors and promoters. It is further noticed from this directors' report that the appellant-company had also entered into a technical collaboration agreement with M/s. MFC, France for manufacture of polyester tiles and also arranged for import of capital goods for the above purpose. The assessee had also applied for conversion of Letter of Intent to industrial lincence and had also taken steps for allotment of a suitable factory site at Aurangabad in a notified backward District. The annual report for 1990-91 further shows that the appellant-company had incurred capital expenditure to the tune of Rs. 103.48 lakhs up to 31-3-1991 towards project implementation and that the civil construction for the proposed factory buildings was making good progress. The assessee was also negotiating with the French company for obtaining upgraded technology. We are referring to all these facts only to show that the appellant-company is not an investment-company as assumed by the departmental authorities but a genuine manufacturing company which was in the process of setting up its factory by erecting the building and importing machinery by raising necessary capital from the public and the financial institutions with the help of foreign collaborators. In fact, the auditor's report in the annual report for 1990-91 shows that the assessee-company was still at construction stage and had not started any manufacturing activity. Thus, it would be clear that the appellant-company was still in its formative stage during the year under appeal as it had no other business activity except that of raising its share capital for the purpose of establishment of its factory for manufacture of polyester marble tiles.
8. In the light of the above facts we are unable to appreciate how any portion of the share capital amount received by the appellant-company from public subscription could be regarded as the undisclosed income of the appellant-company. It is no doubt true that the appellant-company was unable to furnish any further details regarding 13 persons who were not traceable according to the AO and that the appellant also did not produce the eleven shareholders who had filed affidavits before the AO. It does not, however, follow that the share capital subscription received by the assessee from these 25 persons represented the income of the assessee-company which would justify an addition of Rs. 17,87,500 representing 25% of the total share capital of Rs. 71,50,000.
9. We are unable to see how the two decisions in Banshidher Agarwal Panna's case (supra) and Mansurali Valibhai Dudhani's case (supra) would be of any avail to the Revenue on the facts of the present case. On the other hand we are of the view that the decision of the Supreme Court in CIT v. Bharat Engg. & Construction Co. [1972] 83 ITR 187 would be directly applicable to the facts of the present case. That was a case of a construction company which commenced its business in May 1943 and there were several cash credit entries in the first year of its business totalling Rs. 2,50,000. Though the explanation regarding cash credit entries was found to be false, the Appellate Tribunal held that these cash credits could not represent the income or profits of the assessee as they were all made very soon after the company commenced its activities. Upholding the decision of the Tribunal the Supreme Court held that a construction company took time to earn profits and it could not have earned a huge profit within a few days after the commencement of its business and that hence, it was reasonable to assume that the cash credit entries represented capital receipts though for one reason or another, the assessee had not come out with the true story as regards the source of the receipts. This decision of the Supreme Court was sought to be distinguished by the learned dept. representative as rendered before the enactment of Section 68 of the Income-tax Act, 1961. We are unable to agree with this submission of the Revenue. In our view the principle of this decision is equally applicable even under Section 68 of the Act which has only codified the various principles laid down in the earlier decisions of the Supreme Court and various High Courts in regard to cash credits, under the old Act.
10. In the present case it would be noticed that the appellant-company was formed only in the year of appeal and that its only business activity was raising of capital by issue of shares by private placement. Apart from this, it is still in the process of setting up its factory at Paithan by acquiring necessary land in a backward area and also by entering into the necessary foreign collaboration agreement and also arranging for institutional finance from the IFC. The mere fact that the assessee-company was unable to produce 25 shareholders whose names are mentioned in the assessment order would not necessarily lead to the conclusion that the share capital amount received from them by the assessee-company represented the undisclosed income of the appellant-company much less it justify the further inference that a portion of the share capital represented undisclosed income of the appellant-company. We are supported in our conclusion by the latest decision of the Delhi High Court in CIT v. Steller Investment Ltd. [1991] 192 ITR 2871 at p. 288 wherein the Delhi High Court has held as follows :
It is evident that even if it be assumed that the subscriptions to the increased share capital were not genuine, nevertheless under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons. If the assessment of the persons who are alleged to have really advanced the money is sought to be reopened, that would have made some sense but we Jail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself.
11. We, therefore, respectfully follow the decision of the Supreme Court and of the Delhi High Court referred to above and hold that there was no justification for treating any portion of the share capital amount received by the assessee as representing the income of the appellant-company from undisclosed sources. In our view Section 68 of the Act would be inapplicable to the facts of the present case. We may further point out that there is a specific prohibition contained in Section 77 of the Companies Act, 1956 against a company limited by shares to buy its own shares. What the department assumes is some thing illegal against the assessee-company under the Companies Act for which there is no material. We, therefore, accept the contentions of the appellant-company and hold that the addition of Rs. 17,87,500 as the income of the appellant-company is clearly erroneous and unsustainable. Accordingly we delete the said addition.
12. In the result, the appeal is allowed.