Calcutta High Court
Hindusthan Tea Trading Co. Ltd. vs Commissioner Of Income Tax on 11 March, 2003
Equivalent citations: (2003)182CTR(CAL)585, [2003]263ITR289(CAL)
Author: D.K. Seth
Bench: D.K. Seth
JUDGMENT D.K. Seth, J.
1. The reference under Section 256(1) has since been made to this Court on the question, viz., "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the appellate order of the CIT(A) by which the CIT(A) had confirmed the addition of Rs. 8,70,387 under Section 68 of the IT Act by holding that the creditworthiness of the individual shareholders and consequently the genuineness of the investment recorded in the books of the company in their names remained unestablished and the AO was, therefore, justified in coming to the conclusion that the alleged subscriptions represented the appellant-company's income of the year from some concealed sources" ?
2. In this case, it is alleged by the assessee that these shares were floated and subscriptions were invited from the public through advertisement in the newspapers and the whole paraphernalia of subscription for shares was undergone in accordance with law. These subscriptions were dealt with through nationalized banks and the receipts were received by cheques. However, the AO and the CIT(A) and the learned Tribunal had treated part of the receipts to the extent of Rs. 8,70,387 as receipt from undisclosed sources of income under Section 68 of the IT Act, 1961 (Act). In the proceedings, the assessee had disclosed the names and addresses of each of the subscribers. The AO had issued notice upon 37 subscribers on test basis, namely, who had subscribed between 300 and 3,400 shares each. Out of these 37 persons, 10 persons appeared and produced satisfactory evidence regarding the genuineness about the persons and the sources of the funds out of which the shares were subscribed. One Mr. Vijay Kumar Singhania appeared and prayed for time, but did not appear subsequently to prove that the 700 shares purchased by him were from his own genuine fund. About 14 persons, though served, did not respond. Whereas in respect of 12 persons, the notices could not be served on the ground that those persons were not available at the addresses given.
3. Mr. Pranab Pal, learned senior counsel, had pointed out that out of 1,47,000 shares, only in respect of purchase of 1,000 shares, particulars of income-tax, files were not disclosed. Whereas particulars of the income-tax files of the subscribers who had purchased 1,46,000 shares in aggregate were disclosed. From the assessment order, he pointed out that the AO had excluded 10 persons who had appeared and the rest he had treated to be an income from undisclosed sources. According to Mr. Pal, the AO had jumped into a conclusion without adverting to the materials placed before him. Once the assessee had discharged his burden prima facie by producing sufficient evidence, it was for the AO to scrutinize the evidence available. Despite having been in possession of the particulars of the income-tax file of each individual subscriber, he did not scrutinize the material. Therefore, according to him, the conclusion arrived at in haste is perverse since the material evidence, though available, were not considered.
4. Mr. Agarwal, on the other hand, contended that disclosure of income-tax file numbers were not sufficient to discharge the onus that lay on the assessee. It was for the assessee to establish the identity of the subscribers and prove their creditworthiness. The assessee was also required to prove the genuineness of the transaction. On the basis of the materials, the identity of the subscribers was not established. There was no scope for proving their creditworthiness or the genuineness of the transaction. The finding is based on the materials placed before the authority concerned. The findings are finding of facts. It does not appear to be perverse. This Court sitting in reference under Section 256 is not entitled to go into the question of fact. Therefore, this reference should be answered in favour of the Revenue and against the assessee.
5. The law, by now, has since been crystallized through various decisions of different High Courts and the apex Court. Many such decisions have been referred to by the respective counsel for the parties. We shall be referring to those decisions at appropriate stage. The principle, deciphered from the various decisions cited, may be enumerated as hereafter.
6. Section 68 of the IT Act, 1961, empowers the AO to treat any sum found credited in the books of account of the assessee for any previous year, if the assessee fails to offer explanation about the nature and sources of such fund or if explanation offered by the assessee is not, in the opinion of the AO, satisfactory, as income from undisclosed sources and charge the same to tax as income of the assessee of that previous year. Therefore, it appears that the power of the AO under Section 68 is not an absolute one. It is subject to its satisfaction where 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. It provides for an opportunity to the assessee to explain the nature and source of the fund. Once it is explained, it is incumbent on the AO to consider the same and form an opinion whether the explanation is satisfactory or not. The expression used in the section clearly lays the burden on the assessee to explain the nature and source of the fund. Unless explanation is offered, the AO is free to treat the fund as income of the assessee from undisclosed sources chargeable to tax. Once explanation is offered, the AO is bound to consider the same. Such consideration is guided by sound principle of law. The opinion so formed must be reasonable and based on materials and shall not be perverse. The extent of the power of the AO while considering the materials produced by the assessee is very wide. It is a question of examining as to whether the apparent is real. The AO is empowered to lift the corporate veil and examine the real nature of the transaction. In the process, it may exercise its power of examining the materials. It may require the assessee to produce further materials if so required. It may seek information from other sources on the basis of the material produced. In the process of enquiry, 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. It may point out that a particular material was not considered. It may also point out that the enquiry made was not reasonable or was half-heartedly done. The process of enquiry is such that the assessee has to offer the explanation and produce the material in support of such explanation and then it can do no further. The onus then shifts on the Revenue to scrutinize the materials and form an opinion on the basis thereof. For the purpose of scrutinizing the materials, it may utilize its powers to seek attendance of any witness or disclosure of any information in exercise of its power under Section 131. It may seek information from other sources in exercise of its power under Section 133. Once a reasonable enquiry is made, then the AO can do no further except arriving at a conclusion on the basis of such materials. If the conclusion is adverse wholly or in part to the interest of the assessee, it is incumbent on the AO to intimate or inform the conclusion arrived at to the assessee. When such information or intimation is received by the assessee, the onus shifts on the assessee, He may furnish further explanation or information to support its contention. If further information or materials are furnished, the AO is bound to examine the same and form its final opinion and pass an appropriate order. Such opinion is also subject to examination by the CIT(A) or the learned Tribunal and if it involves a question of law, it is also subject to scrutiny by the High Court under Section 256. Finding of facts may also form a basis of a question of law if the inference drawn from the facts found are not in consonance with the legal principles or the findings are perverse. In such a case the High Court may interfere. If two views are possible, even if the High Court is of the other view, it cannot interfere with the view taken by the taxing authority.
7. The decision in CIT v. Stellar Investment Ltd. cited by Mr. Pal is no longer a good law in view of the decision in CTT v. Sophia Finance Ltd. (FB). But Mr. Pal contended that Sophia Finance Ltd's case (supra) is no more a good law since Steller Investment Ltd.'s case (supra) was affirmed by the apex Court in CIT v. Steller Investment Ltd. . But this view does not seem to be correct. In Steller Investment Ltd.'s case (supra), the apex Court had passed the following order:
"We have read the question which the High Court answered against the Revenue. We are in agreement with the High Court. Plainly, the Tribunal came to a conclusion on facts and no interference is called for. The appeal is dismissed. No order as to costs."
From the above observation, it appears that the Supreme Court has not entered into the question involved or has not decided the ratio laid down. It had plainly held that it was a question of fact. The Supreme Court has not laid down any proposition with regard to the question. It was purely a question of fact with which the apex Court had dealt with and was in agreement with the High Court on conclusion of facts. Therefore, it cannot be said that the Supreme Court answered the ratio laid down as sought to be propounded by the Delhi High Court in Steller Investment Ltd.'s case (supra). 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 adverting to the ratio laid down does not create a precedent. In order to support this view, we may refer to the decisions in Municipal Corporation of Delhi v. Gurnam Kaur Gangadharan v. Janardhan Mallar AIR 1996 SC 2124 and Director of Settlement v. M.R. Appa Rao . We are, therefore, unable to agree with the contention of Mr. Pal that the decision in Sophia Finance Ltd.'s case (supra) is no longer a good law,
8. In CIT v. Orissa Corporation (P) Ltd. relied on by Mr. Pal, it was held that if the explanation shows that the receipt was not an income in nature, the Department could not act unreasonably and reject the explanation to hold that it was income. If, however, the evidence was unconvincing, then such rejection could be made. The Department cannot merely reject a good explanation unreasonably. In the said case, it was further held that the assessee had given the names and addresses of the alleged creditors, who were income-tax assessees :
"... Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under Section 131 at the instance of the assessee, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were creditworthy or were such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do anything further. In the premises, if the Tribunal came to the conclusion that the assessee had discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises."
9. In CIT v. Prarthana (P) Ltd. disposed of by this Court by Y.R. Meena, J. (as his Lordship then was) and Arunava Barua, J. on 21st March, 2001, relied on by Mr. Pal, after taking into consideration almost all the other decisions, it was held that if there are explanations, the authority has to consider the same and find out as to whether the explanation is sufficient or not. It can reject only when there is no explanation or the explanation is insufficient.
10. In CIT v. Active Traders (P) Ltd. , cited by Mr. Pal, it was held that if the shares had been purchased by the shareholders out of their unaccounted for money, such investment may be liable to be added as the undisclosed income of such shareholders and as such the assessment of the company may not be affected. If source of a cash credit cannot be explained properly, the ITO may assess the sum as the income of the company from undisclosed sources but after making an enquiry, Before any sum is added as the undisclosed income of the assessee-company, a link has to be established between the company and the shareholders unaccounted money and, unless such link is established, it may not be possible to sustain the assessment ultimately.
11. But we are not in agreement with the said proposition in view of the facts and circumstances of this case. Unless the identity of the shareholders is established, the liability in the undisclosed income cannot be shifted to such persons. It is only when the identity is established and the fund is identified and such fund was received from an undisclosed source of income by the shareholder himself, then it can be so held. But then that would not prevent the authority from assessing the said amount at the hands of the assessee-company raising share capital when its explanation is unsatisfactory. Therefore, this decision does not help Mr. Pal to the extent he wanted to rely upon. In order to answer the said question raised by Mr. Pal, we may refer to the decision in Jamna Prasad Kanhaiyalal v. CIT , where it was held that there is no bar in assessing the said amount at the hands of different assessees. Assessment at the hands of one will not preclude the Department from assessing the same at the hands of another if the other conditions are fulfilled.
12. Mr. Agarwal, on the other hand, had relied on the decision in A. Govinda Rajulu Mudaliar v. CIT . In the said decision, it was held that it is not necessary for the Department to adduce evidence to show from which sources the income was derived and as to why it should be treated as undisclosed income. To us, the question seems to be simple. If the assessee fails to prove satisfactorily the source and nature of certain amount of cash received through the accounting year, the ITO is entitled to draw an inference that the receipts are of an assessable nature. Therefore, the burden of proving the source of such income is on the assessee.
13. In Kalekhan Mohammad Hanif v. CIT (1963) 50 ITR 1 (SC), it was held that particular income, derived from a particular source, can be decided only on the basis of the materials and on facts available in the case whether the entry in the books of account of the business is an income of that business or of another business. It is to be decided on facts, which showed the business to which it belonged. It cannot proceed on percentage basis simply because it was so done on the earlier occasion or for any other business. Such case is to be decided on all facts and only when the assessee fails to produce sufficient evidence and the evidence so produced are insufficient then only such a conclusion can be drawn.
14. In Sophia Finance Ltd.'s case (supra), the Full Bench laid down that it is open to the AO to enquire into the identity of the shareholders and their creditworthiness and availability of fund for subscribing the fund. This can be done through a test basis for coming to a conclusion on the basis of percentage. The authority can find out as to whether the shareholders existed. But in the absence of any such enquiry, whether action was validly taken under Section 263 or not, it is certainly a question of law which could be referred to. The ITO would be entitled to enquire and it would indeed be his duty to do so whether the alleged shareholders do in fact exist or not. If the shareholders exist, then possibly no further enquiry need be made, But if the ITO finds that the shareholders do not exist, then in effect it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons. The use of the words "may be charged" in Section 68 clearly indicates that the ITO would then have the jurisdiction if the fact so warrants to treat such credit to be the income of the assessee. If the shareholders are identified and it is established that they have invested money in the purchase of the shares, then the amount received by the company would be regarded as capital proceed and to that extent the observation in the case of Steller Investment Ltd. (supra) is correct. But, if on the other hand, the assessee offers no explanation at all or the explanation offered is not satisfactory, then the provision of Section 68 may be invoked. In the latter case, Section 68 being a substantive section empowers the ITO to treat such sum as income of the assessee, which is liable to be taxed in the previous year in which the entry has been made in the books of account. However, the Full Bench had clarified that it was not deciding nor was it their intention to decide as to whom and to what extent is the onus to show that the amount credited in the books of account is share capital and when does that onus stands discharged. This depends on the facts of each case. Therefore, if the conclusion is arrived at without making necessary and appropriate enquiries with regard to the share capitals raised by the company and to that extent the order passed by the ITO was erroneous.
15. In CIT v. Precision Finance (P) Ltd. relied on by Mr. Agarwal, it was held that it is for the assessee to prove the identity of the creditors, their creditworthiness and genuineness of the transactions. Mere furnishing of particulars is not enough. It was further found on enquiry by the ITO that the assessee was not traceable and there was no such file. Therefore, the first ingredient as to the identity was not established, Similar view was taken in CIT v. Korley Trading Co. Ltd. , cited by Mr. Agarwal. The creditors, should be identified. There should be creditworthiness. There should be genuineness of the transaction. The furnishing of income-tax file number is not enough to prove the genuineness of the cash credit, The assessee has to prove the genuineness,
16. In the present case, it was not a cash transaction but obtained through cheques and that too through nationalised banks after having invited subscription through public advertisement. Therefore, when income-tax file number was given, it was for the ITO to enquire into the same and find out the creditworthiness of the subscribers and genuineness of the transaction. If after making such enquiry, the ITO would have come to the conclusion against the creditworthiness of the subscribers and genuineness of the transaction, then the question would have been otherwise. Therefore, the decision in Korley Trading Co. Ltd.'s case (supra) having regard to the facts and circumstances of the case, we do not think, would help Mr. Agarwal.
17. In K.M. Sadhukhan & Sons (P) Ltd. v. CIT relied on by Mr. Agarwal, it was held that the burden lay on the assessee to prove the genuineness of the cash credits. The assessee had to prove the identity of the creditors, the capacity of such creditors and the genuineness of the transaction. In Juggilal Kamlapat v. CIT , cited by Mr. Agarwal, it was held that the IT authority is entitled to pierce the veil of a corporate entity and look at the reality of the transaction. In CIT v. Durga Prasad More , relied on by Mr. Agarwal, it was held that the discharge of onus is dependent on the facts and circumstances of each case. Whether the initial onus is discharged or not that has to be ascertained from the materials on record. Once the initial onus is discharged, the onus shifts on the Revenue. Then it is for the Revenue to act on it and until it comes to a finding that the explanation is insufficient and unsatisfactory, it could either ask for further explanation or could come to a decision on the basis of such material, but it is also a necessity or incumbent on the taxing authority to discharge their duty before fastening liability on the assessee. Therefore, when the materials are placed before it, the Revenue is duty bound to look into the same.
18. The above decisions almost in one voice laid down that when such question arises, it is incumbent on the assessee to prove and establish the identity of the subscriber and prove their creditworthiness and the genuineness of the transaction. The furnishing of material is not sufficient. The IT authority has a right to pierce the veil and find out the real nature of the transaction. But once sufficient material is produced and explanation is given, the onus is discharged and shifted on the Revenue. Having regard to the materials, it might ask for further materials from the assessee or it might come to a conclusion on the materials so produced as it might in law could arrive at. Once the materials are there, it is incumbent on the assessing authority to enquire into the same. It cannot overlook one or the other materials or it cannot undertake a half-hearted enquiry. When looking at the facts, the Court has every right to scrutinize the situation and find out as to whether enquiry was made reasonably with the prudence of a reasonable man. If after such enquiry having regard to the materials, the officer had come to a conclusion then it would be a finding of fact, unless it is shown that the inference drawn on the basis of the proved fact was perverse. But if some of the materials are not considered or it is stopped there and does not undertake a reasonable enquiry, then the conclusion arrived at, cannot be said to be a legal inference on the ' basis whereof such conclusion could be arrived at. Then it does not remain a question of fact but becomes a question of law.
19. Having regard to the proposition as discussed above and the ratio decided in the various decisions cited by the respective counsel, we may now examine the facts of the present case in order to answer the question referred to.
20. It appears from p. 69 of the paper book that the assessee had contended that the shareholders were income-tax assessees and that their respective balance sheets were enclosed with the income-tax returns and that the share capital was subscribed by them out of withdrawals made from their respective bank accounts. Thus, the identity and creditworthiness of those assessees have been established. Even if we go by the contention at best, the identity of the persons namely Vijay Kumar Goenka and 14 others were definitely established and then their income-tax particulars having been available on record those could have been cross-checked and verified.
21. From the observation made by the learned Tribunal in its order (pp. 87-99 paper book), we find that despite there having been some materials, the learned Tribunal did hot consider the same as is apparent on the face of the record. If we presume that the IT authority could have disbelieved the case, then, in the facts and circumstances of the case, it could do so in respect of 12 shareholders who were not found in the addresses given and on that basis the percentage calculation could have been made. In the present case, the identity of 12 persons who were not found in the addresses was not established. Therefore, the principle laid down therein can be applied only in respect of those subscribers but not in respect of the subscribers whose identity was established. Since the income-tax file numbers were given, therefore, it was for the ITO to enquire about it and find out the creditworthiness of the subscribers and genuineness of the transaction, which was not done.
22. Applying the above principle, in our view, in the present case, so far as the 12 persons who were not found in the given addresses on enquiry, it can be said that the identity of those persons have not been established. Therefore, the second stage of ascertaining their creditworthiness of the genuineness of the transaction is not required to be gone into and on the percentage basis the authority is entitled to proceed on the basis thereof. But so far as the rest are concerned, when the income-tax file numbers were given, the IT authority ought to have enquired into the same. It is further contended that except the subscriber of 1,000 shares, the income-tax file numbers relating to the rest of the subscribers were furnished. The authority was free to disbelieve these 1,000 shares to be genuine transaction. But when the income-tax file numbers were disclosed, even though despite service of notices, the 14 persons failed to respond, it was incumbent on the IT authority to ascertain from the income-tax file numbers whether the files were in existence and on the basis of such files the identity of the shareholders could be established or not and their creditworthiness and genuineness of the transaction could be proved. Until such enquiry was made, it cannot be said that the IT authority had acted upon the materials so disclosed. The onus may not be discharged simply on production of the materials, but, at the same time, once the materials were produced by the assessee and which were already on record, it was incumbent on the taxing authority to find out the creditworthiness of such materials and only after ascertaining the same, it could come to a conclusion. Otherwise, it would be a half-hearted or incomplete enquiry on the basis whereof no definite conclusion could be arrived at.
23. In the circumstances, in our view, the IT authority should have made proper enquiry in the matter and then come to a conclusion. We, therefore, answer the question in the negative in favour of the assessee and remand the case for fresh decision by the learned Tribunal who will remit the matter to the AO for making an enquiry in respect of the income-tax files, particulars whereof in respect of those non-responding 14 subscribers, had been disclosed and return the evidence recorded along with his findings within 3 months to the learned Tribunal for arriving at an appropriate decision. It is expected that the learned Tribunal shall decide the matter within a period of six months from the date of communication. The order of the learned Tribunal is hereby set aside to that extent only.
With these observations, this reference, is, thus, answered.
R.N. Sinha, J.
I agree.