Income Tax Appellate Tribunal - Delhi
Standard Cylinders (P.) Ltd. vs Income-Tax Officer on 6 January, 1987
Equivalent citations: [1988]24ITD504(DELHI)
ORDER
U.S. Dhusia, Judicial Member
1. The appellant-company being aggrieved by the order passed Under Section 263 by the Commissioner of Income-tax, setting aside the assessment for assessment year 1980-81, has brought the issue in appeal before the Appellate Tribunal.
2. The assessee is a private limited company, which was incorporated on 27-11-1978. The first accounting year ended on 30-6-1979, which falls in assessment year 1980-81, the year in appeal. The company showed a loss of Rs. 6,760 in its return filed on 30-6-1980. The ITO after his examination of accounts and after considering the submissions made, modified the loss of Rs. 6,760 to that of Rs. 6,620. According to the Commissioner the assessment made was erroneous and prejudicial to the interests of revenue. He, therefore, caused a notice dated 22-2-1985 to be issued which runs as under:
Scrutiny of the assessment for the asst. year 1980-81 reveals that asst. has not been correctly framed by the ITO. This is the first year of the company in which shareholders have invested a sum of Rs. 9,02,600 out of this, investment made by the shareholders as detailed hereunder has not been properly looked into and they have been accepted without enquiry :
Rs.
(1) Smt. Santosh Kumari 10,000 (2) Shri D.R. Bhatia 25,000 (3) Mrs. R. Geetha 42,000 (4) Shri M.P. Bhatia 24,000 (5) Shri K.R. Sachdeva 10,000 (6) Shri Jurnail Singh 25,000 (7) Shri Rajesh Kumar Sachdeva 20,000
2. Keeping in view the above facts I am of the opinion that asst. framed by the ITO is not only erroneous but prejudicial to the interests of revenue also. I, therefore, intend to invoke the provisions contained in Section 263 of the Income-tax Act.
The assessee-company gave out several pleas, inter alia, the following :
Your honour has observed in your notice Under Section 263 that the investment made by 7 shareholders namely Smt. Santosh Kumari (Rs. 10,000), Shri D.R. Bhatia (Rs. 25,000), Mrs. R. Geetha (Rs. 42,000), Shri M.P. Bhatia (Rs. 24,000), Shri K.R. Sachdeva (Rs, 10,000), Shri Jurnail Singh (Rs. 25,000) and Shri Rajesh Kumar Sachdeva (Rs. 20,000) have been accepted without enquiry by the Income-tax Officer. The contention made by your honour is not correct in view of our submissions made under para (d) above and we are again producing before your goodself bank passbooks of all the 7 shareholders for your examination and if you wish to have more information on this account, we are ready to submit on hearing from your goodself.
Accordingly the company requested the Commissioner to drop the proceedings initiated Under Section 263 of the Income-tax Act and not to proceed further.
3. The Commissioner considered the reply but could not bring himself to agree to the dropping of the proceeding. In his view the assessment which the ITO had made was erroneous and prejudicial to the interests of revenue. The Commissioner, therefore, concluded that the assessment had to be set aside Under Section 263 and the ITO be directed to make a fresh assessment in accordance with law. His finding is contained in para 2 of his order reproduced below :
As per record no details were obtained by the ITO regarding the bank accounts from where these amounts might have been invested nor any enquiry was made from the shareholders regarding the source of investment made by them.
2. It is submitted before me that the ITO had duly verified these deposits in the course of the assessment proceedings and had also examined the bank accounts. It is pointed out that after making requisite enquiries these deposits were accepted by the ITO as genuine and consequently the order cannot be held to be erroneous and prejudicial to the interests of revenue, It is, however, admitted that none of the parties mentioned above are income-tax assessee. The learned counsel for the assessee also could not file any evidence before me to show that the bank accounts were produced before the ITO and were examined by him. As mentioned above there is nothing on the record to show that any enquiry was made by the Income-tax Officer in this regard. Even some of the confirmations appear to have been obtained after the assessment was made. In the case of the depositors who were not income-tax assessees the Income-tax Officer ought to have made enquiry regarding the source of the investments made which has not been done. The failure of the Income-tax Officer to make the enquiries which were obviously called for, makes the order, passed by him, clearly erroneous and prejudicial to the interests of revenue. It is, therefore, necessary that this case should go back to Income-tax Officer for verifying the genuineness of the investments made by the shareholders. The assessment made by the Income-tax Officer is accordingly cancelled and he is directed to make a fresh assessment in accordance with law keeping in view the observations made above.
4. The learned counsel for the assessee addressed on the enquiry made by the ITO. According to him the ITO had insisted for the confirmation from the shareholders during the assessments which were given to him. It was not a fact that confirmations were filed subsequently and not during the assessment. He also placed his reliance on a string of judicial pronouncements to show that Commissioner's order was an instance of illegal exercise of his power Under Section 263. On the other hand, the departmental representative explained to us the necessity of lifting the veil of corporation to ascertain the correct facts about the investments made by the shareholders which appeared in the books of the assessee-company.
5. Having considered the finding of the Commissioner and also the rival submissions we are of the view that Commissioner was not justified on the facts and in the circumstances of the case to find the assessment made by the ITO to be erroneous and prejudicial to the interests of revenue within the meaning of expression used in Section 263 of the Act. It is elementary law that the private limited company is a juristic person which is based on incorporation and on registration under the Companies Act, 1956. It is to be distinguished from a partnership firm which could have been held to be a compendium of names of the partners. This implies that a private company vis-a-vis its shareholders is not what a partnership firm is vis-a-vis its partners. Provisions contained in sees. 41, 146, 150 of the Indian Companies Act, 1956, detail the need of maintaining a register of shareholders and of making an annual return incorporating changes in the register to the Registrar of the Companies. We reproduce for facility a reference to Section 41 :
41. (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entitled as members in its register of members.
(2) Every other person who (agrees in writing) to become a member of a company and whose name is entered in its register of members, shall be a member of the company.
Then Section 146 reads as under :
146. (1) A company shall, as from the day on which it begins to carry on business, or as from the (thirtieth) day after the date of its incorporation, whichever is earlier, have registered office to which all communications and notices may be addressed.
(2) Notice of the situation of the registered office, and of every change therein, shall be given within (thirty) days after the date of the incorporation of the company or after the date of the change, as the case may be, to the Registrar who shall record the same.
Section 150 of the Indian Companies Act then provides that :
150. (1) Every company shall keep in one or more books a register of its members, and enter therein the following particulars :
(a) the name and address, and the occupation, if any, of each member ;
(b) in the case of a company having a share capital, the shares held by each member, distinguishing each share by its member, and the amount paid or agreed to be considered as paid on those shares ;
(c) the date at which each person was entered in the register as a member ;
(d) the date at which any person ceased to be a member.
A perusal of these provisions shows that the company has got to maintain not only a registered office but also a statutory register of shareholders giving their names, full particulars of their addresses and their shareholding. But nowhere the Companies Act authorises it to seek information from its shareholders regarding the source of their investment made in its shares. Our familiarity with the provisions of Income-tax Act also informs us that a company is not authorised to enquire from which source the shareholders have made their investments. It is enough for the company to know if they have made the subscriptions or investment in shares of the company, the number of shares subscribed and held and their full particulars of address to which a notice could be sent. But the company is not entitled to enquire from its shareholders about their source of money. How could then revenue raise a query about the source from which the shareholders have raised the funds to invest the shares in the course of making the assessment of the company. Although the ITO had asked for the confirmation of shareholders and the company had complied, in cur view the ITO had not proceeded within the framework of law to undertake such an enquiry. As far as the names and addresses of shareholders and their shareholdings are concerned, the company is required to maintain a statutory book-the shareholders' register to show the shares subscribed by the shareholders in course of making the assessment of the company was illegal and unwarranted exercise of authority which does not find any support from law. If the company could not ask for the source from which the shareholders made the investments the ITO in course of making the assessment could not ask the company to account for the source from which the shareholders met the cost of investment. Law does not prescribe for the impossible or the illegal to be accomplished for compliance. It can prescribe only such obligation as is capable of being accomplished and not only reasonable and lawful but also within the realm of possibility. Unless there was authority given to the company to ask for the source from its shareholders regarding investment such a query could not have been raised lawfully by the ITO in the course of making the assessment of the company.
6. There is another way to look at the issue, if the company could not ask for information about the source of investment, could the ITO undertake the enquiry at all. The power of the ITO is plenary but that exercise of power must be subject to limitations placed by reason and necessity. In the present case the ITO was not proceeding against any shareholder to determine his liability for tax. He was making the assessment of the liability of the company. In the course of making the assessment of the company, he was not justified as we have already indicated above in raising such a query from the company on account of its want of power to seek information from shareholders regarding the source of investment but also for the fact such an enquiry was not to affect the quantum of the liability of the company. Take for granted that a shareholder is not able to account for the source of the funds as invested in the shares of the company. Will the ITO be justified in including the unexplained funds to be the income of the company derived from undisclosed sources. The answer is a categorical 'No'. We have already brought out that the relationship of the company vis-a-vis its shareholders is not what it is in the case of a partnership firm vis-a-vis its partners. The veil of incorporation makes the company a separate juridical entity distinct and distinguishable from its body of shareholders who are also liable for their own liability for tax. Therefore, a company cannot be held liable for the liability for its shareholders. Provision contained in Section 68 was referred to by the D.R. in her address. It was contended that Section 63 casts on the assessee to account for the source of the funds found credited in its books of account. Therefore, according to the D.R. the enquiry made by the ITO would not be an illegal exercise of discretion, but would appear to be provided for by the provisions contained in Section 68. It appears the D.R. made out the plea losing sight of the fact that a company was different and distinct juridical entity different from its body of the shareholders. The company cannot be held as indicated above liable for the liability of its shareholders. On the other hand, the onus cast on the company stands discharged as soon as it refers to the credits to persons who are its shareholders and whose names are registered in the register of shareholders. A perusal of the register of shareholders gives not only the names, full particulars of addresses but also the number of shares and the value of the shares invested by each shareholder. What more facts are needed to establish the identity and financial capacity of shareholders as investors. A reference to the register of shareholders should be held to end the enquiry by the ITO to ascertain the source of funds invested and found in the books of the company. Seven persons whose addresses were known had subscribed for the funds credited in their names representing their investment in shares. As far as the company is concerned, the onus regarding funds credited in its books got fully discharged if those funds represent funds for investment made in its shares. Law does not cast a burden higher than the burden of proving the source. Law does not entitle an ITO to insist from the assessee that he should not only prove the source but also the source of the source. The shareholders whose names were-duly registered in the register after having made the investment could not deny that they had not subscribed to the shares standing in their names and if they could not deny it was for them and not for the company to account for the source of interest in their own assessment proceedings and not in the asst. proceedings of the company. Therefore, a consideration of Section 68 of the IAC also does not affect our finding that the enquiry from company about the source of investment of its shareholders in the shares of company was unauthorised and uncalled for in the assessment of the company. Therefore, the Commissioner, in our consideration went in error when he held that an enquiry was not made by the ITO regarding the source of investment in the shares of seven persons who were registered as shareholders and whose names were entered in its register of shareholders. The company could not undertake to enquire into the source how these investments had been made by the individual shareholders as indicated above. Therefore, the Commissioner was not justified in holding that the failure of the ITO to make such enquiry during the assessment proceedings made the assessment erroneous and prejudical to the interests of revenue. Taking this view of the matter we hold that the order of the Commissioner passed Under Section 263 cancelling the assessment, was made without a correct appraisal of facts and appreciation of law. Therefore, we cancel the order of the Commissioner and restore the order of the ITO.
7. In the result appeal is allowed.