Delhi High Court
Allen Bradley India Ltd. vs Dy. Cit on 13 June, 2001
Equivalent citations: [2001]80ITD43(DELHI)
ORDER
These are two appeals by assessed and department against the order of Commissioner (Appeals) dated 10-11-1995 relating to assessment year 1989-90.
2. We will first take up the appeal of the department in ITA No. 445(Delhi)/96. The following grounds of appeal have been taken by the department:-
"On the facts and circumstances of the case, the learned Commissioner (Appeals)-I, New Delhi erred in :
(i) allowing a relief of Rs. 1,64,70,000 made on account of unexplained cash credit u/s 68 of the Income Tax Act, 1961 despite the fact that after availing sufficient opportunity the assessed-company did not place necessary material evidence in support of its claim.
(ii) in allowing a relief of Rs. 45 lakhs made on account of unexplained cash credit u/s 68 of the Income Tax Act, 1961 despite the fact that after availing sufficient opportunity the assessed-company did not place necessary material evidence in support of its claimed.
(iii) allowing an amount of Rs. 29,00,148 disallowed by the assessing officer on account of interest tax on interest free advances despite the fact that such expenses was made to divert the funds for non-business purposes.
(iv) allowing interest of Rs. 3,18,819 disallowed by the assessing officer despite the fact that the company had to pay huge interest on funds borrowed by it."
3. Brief facts of the case are that the assessed-company is doing the business of manufacturing and selling of ICAM-PLC system. ICAM stands for Integrated Control Automation Monitoring & PLC stands for Programmable Logic Control. The share capital of the company as on 1-4-1988 being the first day of the previous year 1988-89, stood at Rs. 135 lakhs, being the nominal value of 1,35,000 shares of Rs. 100 each. The shareholders were as under:-
Name No. of shares Nominal value
(i) M/s Allen Bradley (Overseas) Ltd., U.K. 52650 52,65,000
(ii) M/s Debikay Technologies Ltd.
82350 82,35,000 3.1 During the year under consideration the appellant company issued right shares to the existing shareholders in the ratio of 2:1, i.e., 2 shares for every one share held. Thus, M/s Debikay Technologies Ltd. (hereinafter referred to as the M/s DTL) had right to subscribe 1,64,700 shares, of which it subscribed to only 1,24,700 shares at the rate of Rs. 100 per share, amounting to Rs. 124.20 lakhs and renounced its right in respect of balance 40,500 shares in favor of M/s Magestic Trading & Services Ltd. (hereinafter referred to as the M/s MTSL), who subscribed to the same at Rs. 100 per share aggregating to Rs. 40.50 lakhs. These two investments, i.e., of Rs. 124.20 lakhs and Rs. 40.50 lakhs were questioned by the assessing officer under section 68. The assessed was required to prove the genuineness of the shareholders and also their capacity to subscribe to the share capital. It was submitted by the assessed that the source of funds for investment in the hands of M/s DTL, came out of the funds provided by its holding company, viz., M/s Debikay Information Technologies Ltd. (hereinafter referred to as the M/s DITL). Again, in the hands of MTSL the assessed furnished information to the effect that the said company invested in the shares of assessed-company through funds received from its shareholders, especially from M/s Chaturvedi Estates. The confirmation letter from respective parties were produced along with the annual accounts and list of shareholders. Certificates regarding the investment were also filed along with Cheque no. and other details. The income-tax number along with copies of assessment orders were filed before the assessing officer. The assessing officer was not satisfied with the reply filed by the assessed. In his view, the shareholding companies are fake and just name lender of Mr. D.K. Khaitan or his family members. It was further observed by the assessing officer that the concerned companies were just creation on papers by one Shri C.L. Bhansali and he further remarked that the shares shown to have been purchased in these names are fictitious and should be regarded as the black money of Shri D.K. Khaitan or his family members. Accordingly the assessing officer held that the share capital subscribed by M/s MTSL cannot be accepted to be genuine. In similar way the investment made by M/s DTL, was also held as fictitious and bogus. Accordingly the impugned addition of Rs. 1,64,70,000 was made as unexplained cash credit under section 68 of the Income Tax Act, 1961.
3.2 The amount of Rs. 45 lakhs received from M/s DTL as loan was also disallowed on the reasoning narrated above. This cash credit was also disallowed and added to the income of the assessed under section 68 of the Act.
3.3 These additions were challenged before the Commissioner (Appeals) and the detailed submissions were filed before the Commissioner (Appeals). All the contentions raised before the assessing officer were again raised before the Commissioner (Appeals), who after considering the details filed before the assessing officer as well as before him, was of the view that the assessed deserves to succeed in these grounds, as narrated above, accordingly these additions were deleted. Detailed reasonings were given by the Commissioner (Appeals) in his order from pages 4 to 21. Against the findings of the Commissioner (Appeals) the department is in appeal here before the Tribunal.
3.4 The learned Departmental Representative placed reliance on the order of the assessing officer, whereas the learned counsel of the assessed placed reliance on the order of the Commissioner (Appeals).
3.5 We have heard rival submissions and considered them carefully. We noted that assessing officer made an addition of Rs. 1,64,70,000 in share capital account under section 68 of the Income Tax Act and addition of Rs. 45 lakhs again under section 68, by disproving the loan taken from M/s DTL. While disallowing the claim under section 68, three conditions have to be taken into consideration. From the orders of the assessing officer as well as from the order of the Commissioner (Appeals), we noted that all the three conditions laid down for the purpose of genuineness of the investment or loan taken from a third party, are fulfillled in the present case. In the case of share capital of Rs. 124.20 lakhs by M/s DTL, we noted that assessed had filed complete details. In the case of M/s DTL, the company had filed the list of 10 top shareholders of M/s DTL. The certificate regarding investment as on 31-3-1989; confirmation regarding payment to M/s DTL; list of Directors of M/s DTL, as on 31-3-1989; audited accounts from 1-10-1985 to 31-3-1989; Memorandum of Articles of Association; Extract from daily quotation list of Delhi Stock Exchange have also been filed, along with details of GIR No.; ward where M/s DTL is assessed and certificate for commencement of business and prospectus of share issued. We further noted that the list of top 20 shareholders as on 10-2-1988 and again the list of top 20 shareholders as on 30-9-1991 was also filed, along with their PAN and assessment orders. We further noted that similar details were filed in respect of M/s MSTL in whose name the share capital was of Rs. 40.50 lakhs. We also noted that these companies shares are quoted in Delhi Stock Exchange. The assessing officer's observations that these two companies are just fake and benami and creation on papers only, cannot be approved as they have no locas standi, as both the companies are regularly assessed to income-tax and their shares are quoted at Delhi Stock Exchange. The evidences were placed before the assessing officer as well as before the Commissioner (Appeals). The above said information clearly establishes that both the companies were genuine; the transactions were genuine and sources were also genuine as their creditworthiness has already been proved as per their balance-sheets filed before the department, which were duly accepted by the department. Therefore, there is no question for drawing any adverse inference against these companies without bringing out any other information on record. Therefore, we do not find any infirmity in the order of Commissioner (Appeals), who after examining all these information in detail, then accepted the submission of the assessed and accordingly both the additions, i.e., of Rs. 1,64,70,000 and Rs. 40.50 lakhs were deleted. We further noted that Commissioner (Appeals) has also examined the issue on legal aspect also, as the decision of the jurisdictional High Court in the case of CIT. Stellar Investment Ltd. (1991) 192 ITR 287 and in the case of CIT v. Sophia Finance Ltd. (1994) 205 ITR 98 were considered, and then the decision of the Supreme Court in the case of Commissioner. Kwick Travels (ITC No. 168 of 1991), where SLP filed by the department was dismissed by the Hon'ble Apex Court. In the case of Kwick Travels (supra), the assessed-company had increased its share capital, which it claimed, was received in cash. The assessing officer held that identity of the persons who had acquired the shares as well as their creditworthiness were not established and treated the value of the shares as income from undisclosed sources of the assessed. The Commissioner (Appeals) reduced the amount of such income and the Tribunal affirmed his order. The Tribunal and Hon'ble High Court rejected the reference application of the department and SLP filed before the Hon'ble Supreme Court was also dismissed.
3.6 The Hon'ble High Court in the case of Stellar Investment Ltd. (supra) had held that the share capital of a limited company cannot be brought to tax as unexplained cash credit on the same footing as a spurious loan can possibly be assessed. It is observed by the Honble High Court as under :-
"It is evident that even if it be assumed that the subscribers 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 assessed, 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 fail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself."
3.7 The department filed SLP before the Hon'ble Supreme Court against this order of the High Court and the SLP has been dismissed by the Supreme Court vide their order dated 20-7-2000 by holding as under:-
"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 the conclusion on facts and no interference is called for. The appeal is dismissed."
3.8 In a subsequent decision in the case of Sophia Finance Ltd (supra) the observations of the Delhi High Court, as mentioned above came in for a review by Full Bench of the same court. In that decision the Hon'ble court has held that assessing officer 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. It was further observed by the Hon'ble High Court that if the shareholder exists then possibly no further enquiry need be made, but if the assessing officer finds that the alleged shareholders do not exist, then, in effect, it would mean that there is no valid issuance of share capital as shares cannot be issued in the name of non-existing persons. There is no dispute that in such a case the assessing officer has jurisdiction if the facts, so warrant, to treat such credit to be the income of the assessed.
3.9 We have seen that on the facts of the present case the assessed had filed each and every detail. The shareholders are in existence; they are assessed to tax; complete details are available; share capital money as well as loan are received through account payee cheques and they were cleared through proper banking channels. Therefore, we feel that even the ratio of the decision in the case of Sophia Finance (supra) is applicable on the facts of the present case, because assessed has discharged its onus by furnishing full details of the shareholders and depositors.
3.10 Of course in the case Sophia Finance (supra), the Full Bench of the Hon'ble High Court has not laid down any norms for deciding the extent of onus of proof of the amounts credited. The Hon'ble Full Bench has observed as under :-
"We make it clear that we are not deciding, nor it is our intention to decide as to on whom and to what extent is the onus to whom that an amount credited in the books of account is share capital and when does that onus stand discharged. This will depend upon on the facts of each case."
3.11 This significant observation of the court clearly points out that there is a subtle distinction between an ordinary cash credit and a credit by way of share capital. Apparently, the court had in its mind the comprehensive law contained in the Companies Act, 1956 on the acceptance of share application money and allotment of shares in consideration therefore. While in the case of ordinary loans obtained, there are overwhelming judicial decisions to say that the onus is on the assessed to prove not only the identity of the creditor, but also to prove the genuineness and the capacity of the persons to lend. With reference to share capital for which shares have been issued, the onus on the company is very much limited in the light of the law under the Companies Act. The Full Bench decision, referred to above, makes it clear that in the case of limited companies the jurisdiction of the assessing officer would be limited only to see whether the identity of the shareholders is established and whether they exist or not. Once the identity is established, then, as the Full Bench felt, possibly no further enquiries need to be made. This conclusion was arrived at by the Honble High Court apparently due to the reason that when limited companies, especially public limited companies, invite subscriptions towards their share capital either by private placement or by public issue, it is neither legally possible nor practicable for such companies to insist upon the sources of share subscriptions being made known to the company. Even regarding the proof of the existence and identity of the shareholders, the public limited companies can only provide the assessing officer with the information contained in the statutory share applications/documents/registers maintained by the companies. In this connection it is worthwhile to appreciate the following comprehensive law laid down under the Companies Act, 1956 regarding the issue and allotment of shares by companies.
3.12 section 68A of the Companies Act speaks about personation for acquisition of shares. According to this section, any person, who makes in a fictitious name an application to a company for acquiring or subscribing for any shares therein, or otherwise induces a company to allot or register any transfer of shares therein to him or to any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend to five years. These provisions are required to be prominently reproduced in every form of application for shares which is issued by the company to any person. It is worthwhile noting that these provisions were introduced in the Companies Act with effect from 1965 based on the recommendations of the Bose Commission. The Commission had adverted to a case where shares to the extent of Rs. 16 lakhs in a public company were applied for on behalf of non-existing shareholders. The Commission itself took note of the fact that benami shareholding and shareholding in the names of fictitious or non-existing persons was common. The Commission, therefore, felt that this practice should be severely dealt with and, accordingly, applying for shares in fictitious names was made a punishable offence under the Act. It has to be carefully noted that the company as such is not visited with any adverse legal consequence or is deemed to commit any offence but it is only the person who makes the application in fictitious name or otherwise, induces a company to allot a share in fictitious name who is made punishable with imprisonment.
3.13 According to section 72, no allotment can be made without an application in writing and, the company can call for only certain limited information from the shareholders for the purpose of allotment.
3.14 section 75 of the Companies Act specifies that, whenever a company, having a share capital, makes any allotment of its shares then it shall within 30 days thereafter, furnish to the Registrar a return of the allotments, stating the number and nominal value of the shares comprises in the allotment, the names, addresses and occupations of the allottees and the amount paid or payable on each share.
3.15 section 77 of the Companies Act prohibits a company from purchasing its own shares or providing any person with funds for purchase of its own shares.
3.16 From the above narration it is very clear that any company who invites application for allotting the shares to public, is entitled only to issue shares against the applications received by it. As per section 72 of the Companies Act, a company can only seek certain limited information from the shareholders. However, in the case of Standard Cylinders (P) Ltd. v. ITO (1988) 24 ITD 504 (Del), the Tribunal has held that company cannot even seek information from the shareholders regarding the source of their investment in those shares.
3.17 In the present case here before us, even all these informations were furnished before the assessing officer. The sources were furnished by filing balance-sheets, bank accounts etc. Assessment records were filed. As we have already stated, that all transactions were made through proper banking channels. Therefore, we feel that the assessing officer was not justified in disbelieving the share capital investment by the shareholder companies.
3.18 Similarly, we are of the view that assessing officer again was not justified in disbelieving the loan of Rs. 45 lakhs taken from M/s DTL, as the cheque was cleared through bank channels on 21-7-1988. Confirmation and other supporting evidences were filed and bank copy was also filed. Therefore, there was no point to disbelieve the loan amount of Rs. 45 lakhs. Therefore, in view of these facts, and circumstances and in view of the legal position, we hold that the Commissioner (Appeals) was justified in deleting both these additions.
4. Ground Nos. 3 and 4 in appeal of department are against the deletion of additions of Rs. 29,00,148 and Rs. 3,18,819 on account of disallowance of interest made by the assessing officer.
4.1 Brief facts in regard to these two additions are that the assessing officer noticed that total liability for payment of interest incurred by the appellant during the relevant accounting year was Rs. 53,59,328. The assessing officer further noted that certain amounts had been advanced by assessed-company to M/s DITL free of interest. The assessed was required to explain the reason for advancing the amount free of interest and why interest to this extent should not be disallowed. It was stated by the assessed that these amounts represented advances in connection with the business and in absence of any understanding for charging of interest, the assessed could not have computed any interest on these advances. The assessing officer was not satisfied. Accordingly he disallowed the interest liability in a sum calculated at the rate of 18 per cent on the average outstanding in respect of the advances and other loans given by assessed to third parties. Accordingly the above stated two additions were made.
4.2 It was submitted before the Commissioner (Appeals) that the appellant company had close business relationship with the subsidiary company, M/s DITL. It was further stated that the company is engaged in the business of supply of Integrated Automation Monitoring System used in the processed plants, like cement etc. and during the assessment years 1988-89, 1989-90 and 1990-91 the assessed-company made advances against the supplies, as the same was agreed by both the parties to make payment in advance. It was further submitted that the assessed-company had its own funds amounting to Rs. 1.68 Crore and Rs. 4.38 Crore as on 31-3-1988 and 31-3-1989 respectively. Accordingly it cannot be stated that assessed had advanced the money from interest bearing funds, as the funds stated above, were also of non-bearing interest. It was further stated that assessed-company advanced money to its subsidiary company against the supply of items. Likewise, the assessed-company was also receiving advances from the parties, to whom the assessed-company is making supplies and these advances received by assessed were to the tune of Rs. 99.97 lakhs as on 31-3-1988 and Rs. 114.37 lakhs as on 31-3-1989. After perusing these submissions of the assessed the Commissioner (Appeals) was convinced that there were surplus funds with the assessed-company, on which no interest was paid and from these funds the advances were made. Therefore, without proving any nexus no interest can be charged notionally. Accordingly both these two additions were deleted by the Commissioner (Appeals).
4.3 Again the learned Departmental Representative placed reliance on the order of assessing officer here before us and on the other hand, the learned counsel of the assessed placed reliance on the order of the Commissioner (Appeals).
4.4 After perusing the orders of the authorities below, we do not see any infirmity in the order of the Commissioner (Appeals). The amounts, which were advanced by assessed to M/s DITL, were as under:
Accounting year ended on Opening Balance Advances Made Supplies/Recoveries made Closing balance 31-3-1988 0.55 105.44 18.58 85.41 31-3-1989 85.41 198.37 167.67 116.11 31-3-1990 116.11 166.45 177.49 105.70 4.5 From the above chart it is seen that the advances of Rs. 116,11 lakhs were outstanding against M/s DITL and against these advances the funds available with the assessed as on 31-3-1989 were to the tune of Rs. 4.38 Crores and Rs. 114.37 lakhs as advances received from its customers were available with the assessed. If these two figures are taken into consideration, then there is no scope for charging any notional interest, because the assessing officer could not prove that on these two amounts the assessed paid any interest. On amount of Rs. 4.38 Crores there was no requirement to pay any interest, as these funds were assessed's own funds and again on the amount of Rs. 114.37 lakhs, which was received from the customers as advance, the assessed was not required to pay any interest and there is no dispute also that assessed had not paid any interest on this amount received from customers. The closing balance on account of advances made by assessed as on 31-3-1989 was only 116.11 lakhs, which is almost equal to the amount received by the assessed as advance from the customers. Therefore we do not see any reason for disallowing interest at the rate of 18 per cent on the amount of Rs. 116.61 lakhs. Likewise we feel that there is no point to disallow the interest of Rs. 3,18,819 as the facts are similar as in regard to addition of Rs. 29,00,148. Accordingly we confirm the order of the Commissioner (Appeals) on both these additions.
5. Now we will take the appeal of the assessed. The following effective ground of appeal has been taken by assessed :-
"That the learned Commissioner (Appeals) has erred in not allowing the claim of deduction of technical know-how under section 35AB of the Income Tax Act, 1961."
5.1 Brief facts in regard to this issue are that assessed purchased technical know-how from its subsidiary company, i.e., M/s DEIL and had paid Rs. 70 lakhs in consideration therefore. This technical know-how was purchased by entering into written agreement dated 26-1-1989. The assessed claimed amortization at the rate of 1/6th of the total consideration in accordance with provisions of section 35AB. The assessed was required to substantiate its claim by filing the evidence. Written reply was filed wherein it was explained that the consideration is paid to M/s DEIL through account payee cheque as per agreement dated 26-1-1989 and it was further explained that after acquiring the technical know-how the assessed-company was benefited, as after using the technology the assessed-company's profits were higher in all the subsequent years. The explanation of the assessed was not accepted by the assessing officer and by observing that the subsidiary company had almost gone into liquidation and the same was before Board for Industrial & Financial Reconstruction. It was further observed by the assessing officer that assessed-company paid the amount just to help the subsidiary company. Accordingly he rejected the claim of the assessed. Commissioner (Appeals) also confirmed the action of the assessing officer by observing as under :-
"I am unable to agree with the appellant. It is not believable that the technology obtained from M/s DEIL as far back as in 1976 could fetch a market value of Rs. 70 lakhs, 23 years thereafter in 1988-89. Apparently, the payment had been made to DEIL to revive the same from its sickness. In any case, the evidences produced by the appellant are not strong enough to support a claim of payment of Rs. 70 lakhs. I am, therefore, inclined to agree with the assessing officer that the amortisation claimed by the appellant is not allowable. Accordingly, this ground is dismissed."
5.2 Now the assessed is in appeal against these findings of Commissioner (Appeals) here before us.
5.3 The learned counsel of the assessed submitted that both the lower authorities are not disputing allowability of the claim. However, they were disputing that the technology purchased for Rs. 70 lakhs was not genuinely purchased, as the observations of the authorities below were that the assessed paid a sum of Rs. 70 lakhs just to revive that party from its sickness. In this regard it was submitted that in fact, this is not correct because that company could not revive till date. Further it was submitted that there is no dispute in regard to payment. It was further submitted that there is also no dispute that assessed had earned lot of profits after the purchase of this high technology, which was acquired by the subsidiary company from its parent company of USA in 1976. It was further stated that this is not the case of the department that the value of the technical know-how is not Rs. 70 lakhs, as from the profits earned by assessed, it can be easily ascertained that the assessed has earned huge profits which were many times more than the consideration paid by assessed. It was further submitted that the agreement was genuine. Attention of the Bench was drawn on the copy of agreement placed at page 56 in the paper book. Therefore, it was pleaded that the claim of the assessed should be allowed.
5.4 On the other hand, the learned Departmental Representative strongly placed reliance on the orders of the authorities below.
5.5 After hearing rival submissions and considering the material on which our attentions were drawn, we feel that assessed deserves to succeed, as there is no dispute in payment. There is no dispute in regard to allowability of the claim as per provisions of law. The authorities below is disputing the bona fide intention of the assessed in regard to payment of Rs. 70 lakhs by observing that technology was not worth for which the assessed paid Rs. 70 lakhs, as the authorities below have observed in their order that the assessed paid this amount just to revive the subsidiary company from its sickness. In our considered view, these observations are not correct as the technology acquired by the subsidiary company M/s DEIL from its parental company in 1976 was used by its subsidiary company and then again was used by assessed from assessment year 1989-90 onwards and from the chart filed by assessed, the assessed-company earned huge profits after acquiring the technology. In 1989-90 the profits earned by assessed were Rs. 2.89 lakhs; in the assessment year 1990-91 these profits increased to Rs. 10.33 lakhs, and again from assessment years 1991-92 to 1993-94 they were increased to Rs. 68,78 lakhs; Rs. 87.57 lakhs and Rs. 115.30 lakhs respectively. We further noted that after acquiring the technical know-how the company was able to obtain the following major turnkey contracts :
(i) Kalyanpur Cement 242 lakhs
(ii) TISCO Cement Project 355 lakhs
(iii) Hira Cement Project 239 lakhs
(iv) Rathi Steel & Alloys Ltd.
113 lakhs
(v) Keshri Steels & Alloy Ltd.
99 lakhs 5.6 After perusing the written submissions we further noticed that the subsidiary company was in this line since 1979 and was using the same technology; whereas the present assessed came in this business in 1985 only and after acquiring the technical know-how in financial year 1988-89, the assessed-company started earning profits. Therefore, the bona fide intention of the assessed should not have been doubted by the lower authorities. We further noted that these very submissions were before the Commissioner (Appeals), but from the order of Commissioner (Appeals), it is clear that these submissions were not considered by him. He just confirmed the order of the assessing officer. Therefore, we are of the view that without controverting the submissions or without bringing out any material on record that the assessed has not paid the sum of Rs. 70 lakhs for acquiring technical know-how, the claim of the assessed should not be disallowed. If the assessing officer was not satisfied with the explanation in regard to purchase of technology, then onus is on the assessing officer to discharge the burden by bringing positive evidence that the amount paid to the subsidiary company was not for the purpose of technology, but was for the purpose of helping the subsidiary company. The assessing officer failed to do so and again the Commissioner (Appeals) also erred in confirming the action of the assessing officer without bringing out any cogent material against the assessed. Therefore, in view of these facts and circumstances we hold that the claim of amortization at 1/6th is allowable under section 35AB of the Income Tax Act. Accordingly we direct the assessing officer to allow the claim of the assessed.
6. In the result, the appeal of the department is dismissed and the appeal of the assessed is allowed.