Rajasthan High Court - Jaipur
Shree Barkha Synthetics Ltd. vs Astt. Cit on 2 August, 2005
Equivalent citations: [2006]155TAXMAN289(RAJ)
JUDGMENT
This appeal is preferred by the assessee against the order of the Income-Tax Appellate Tribunal, Jodhpur Bench, Jodhpur, dated 28-11-2001, relating to the assessment year 1997-98. Against the very same judgment of the Tribunal, the revenue had also preferred an Income-tax Appeal No. 09/2003 which has been decided on 1-5-2003 CIT v. Shree Barkha Synthetics Ltd. (2004) 270 ITR 477 (Raj.), holding that no substantial question of law arose in the case by adverting to the contentions raised before the Tribunal and the facts of the case.
2. In the present case, the assessing officer reached his conclusion that in the previous year relating to the assessment year, there has been increase in the share capital of the assessee-company on account of issue of shares. The shares have been issued to limited companies as well as individuals on the basis of receipt of share applications through banking channels.
3. The Tribunal has noticed the break-up of share application money, which has been added by the assessing officer in the taxable income of the assessee as unexplained cash credits, by invoking section 68 of the Income Tax Act, 1961.
4. The aforesaid amount has been added by the assessing officer primarily for the reason because he was of the opinion that the applicant's creditworthiness has not been proved.
5. In appeal, the additions made on the aforesaid account were affirmed by the Commissioner (Appeals).
6. However, the Tribunal found that out of the seven companies from which the share application money has been received, six are genuinely existing and no enquiry has been conducted in respect of their source of share application money received at the time of making of the investment in the company. The assessee has discharged his initial burden and the revenue has failed to discharge its burden as it did not hold any enquiry into the genuineness of those transactions. However, the Tribunal found that the genuineness of the transactions with the Westbury Invest Trade (P) Ltd. viz., receipt of Rs. 2 lakhs by way of share application money was not established by the assessee because no confirmation from Westbury Invest Trade (P) Ltd. was produced by the assessee and, therefore, the additions of the said Rs. 2 lakhs received from share application money from the company were sustained.
7. Amongst individuals, the share application money alleged to have been received from one Umesh Kumar amounting to Rs. 1 lakh was found to be not genuine, inter alia, on the ground that on enquiry, the said Umesh Kumar has denied to have made any such investment in the shares of the company. On this basis, the addition of Rs. 1 lakh was made in the income of the assessee from undisclosed sources under section 68 of the Income Tax Act which was sustained.
8. The revenue had filed Income-tax Appeal No. 9 of 2003 Shree Barkha Synthetics Ltd. (supra) to the extent it was aggrieved with deleting the additions made by the assessing officer on account of increase in share capital relating to six companies and individuals other than Umesh Kumar. The said appeal has since been dismissed.
9. The aforesaid two additions are the subject-matter of this appeal by the assessee.
10. The following substantial questions of law were framed at the time of the admission by the court:
"Question No. 1. Whether the Income Tax Appellate Tribunal has failed to appreciate the burden of proof lies on the department to show that the money invested by the shareholders in question belongs to the appellant-company and whether such onus stood discharged by the department ?
Question No. 2. Whether the Income Tax Appellate Tribunal has fallen into error in observing that confirmation of investment in share capital by M/s. Westbury Investment Trade (P.) Ltd. was not filed whereas it was actually furnished, as is evident from the assessment order itself ?"
11. The principle which the Tribunal has applied in reaching its conclusion in deleting the additions made by the Income Tax Officer, relating to increase in share capital by receipt of money from share applications, was stated in the decision of the Delhi High Court in CIT v. Steller Investment Ltd. (1991) 192 ITR 287 (Del), affirmed on appeal by the Supreme Court in CIT v. Steller Investment Ltd. (2001) 251 ITR 263 (SC).
12. In Steller Investment Ltd. (supra), the principle which was enunciated by the Delhi High Court and affirmed by the Supreme Court, reads 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 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 fail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself." (p. 288)
13. The reason for the aforesaid conclusion was obvious that there is no personal contract between the company and the share applicants. The transactions are made through banking channels and, therefore, once the existence of persons by name in the share applications has been made and in whose name the shares have been issued, the company cannot be held responsible to prove whether the person in whose name the share application has been applied is the very same person or is somebody else. The position may be somewhat different in a case of cash credit found in the books of account as loan from any person, where the company and the creditor have personal interaction.
14. The Full Bench of the Delhi High Court in another case in CIT v. Sophia Finance Ltd. (1994) 205 ITR 98 (Del), on which the revenue relies, had also opined that:
"The mere fact that the (assessee) company chooses to show the receipt of the money as capital does not preclude the Income Tax Officer from going into the question whether this is actually so. Where, therefore, an assessee-company represents that it had issued shares on the receipt of share application money, then the amount so received would be credited in the books of account of the company. The Income Tax Officer would be entitled, and it would indeed be his duty, to enquire 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 Income Tax Officer finds that the alleged 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. . .." (p. 98)
15. The Division Bench of this court in appeal filed on behalf of the revenue in Shree Barkha Synthetics Ltd.'s case (supra) referred to above arising out of the same judgment had followed the aforesaid principle by pointing out the distinction between investment made by persons whose existence have been shown and in a case where existence has not been established. This court held that since the Tribunal finding, the existence of certain persons having been established has deleted such amount to be added in the income of the assessee for the assessment year in question.
16. It is in the light of the aforesaid judgment, the principle relating to burden of proof concerning the assessee is that where the matter concerns money receipts by way of share application from investors through banking channel, he has to prove the existence of the person in whose name the share application is received. Once the existence of the investor is proved, it is not further the burden of the assessee to prove whether that person itself has invested the said money or some other person had made investment in the name of that person. The burden then shifts on to the revenue to establish that such investment has come from the assessee-company itself.
17. Applying the same principle, the real question, therefore, arising in this case is whether the Tribunal reached the finding on the basis of non-existence of Westbury Investors (P.) Ltd. and Umesh Kumar or has sustained additions on other grounds.
18. On a careful perusal of the order of the Tribunal and other material on record, we find that so far as existence of both the investors is concerned, the same has not been found against the assessee. In fact both the additions on account of share application monies received by the assessee were made by the Income Tax Officer not on the ground of non-existence of the said investors but on other grounds.
19. So far as Westbury's case is concerned, the Income Tax Officer rejected the confirmation submitted by Westbury Invest Trade (P) Ltd. on the ground that "otherwise also it is an outside company not having business dealing with the assessee-company which should invest like this. In the absence of complete particulars regarding the availability of funds with the investor and the fact that the identity of the investor company is not established as original letter sent on 7-2-2000, is received back unserved, this investment in share application money is not being considered as genuine and as such being treated as representing the assessee's own money in the shape of share application money".
20. So far as the later part of the finding of the assessing officer about the effect of return of notices is concerned, the Tribunal has not acted upon it. The Tribunal has clearly found in its order that the assessing officer issued notices to the parties on 7-7-2001, but the notices so issued to the creditors by the department returned unserved. The notices sent to them including Westbury Investors (P.) Ltd. could not be served on them for the reason of change in address and it is not clear whether the assessing authority has again sent notices at the changed addresses submitted by the authorised representatives of the assessee.
21. On this aspect of the matter, the Tribunal recorded its finding as under:
"In the instant case analysing the fact situation in its entirety we find that as regards the seven corporate investors, the return of notices unserved is not very material for the reason that the addresses of five of them had changed and the assessee did furnish their changed addresses along with their confirmations but the assessing officer thereafter took no further steps/efforts to pursue/effect the service of notice on them and make enquiry."
22. The real ground which has prevailed before the Tribunal for sustaining the additions made in respect of investment made by Westbury Invest Trade (P.) Ltd. is that the assessee has not furnished confirmation from Westbury Invest Trade (P.) Ltd. whereas the ground on which additions made in respect of other companies were deleted because the confirmation letters were submitted by the assessee.
23. Apparently the ground for sustaining the additions made in respect share application money received from Westbury Invest Trade (P.) Ltd. is contrary to the record.
24. The assessing officer has himself referred to the confirmation letter received from the said company, viz., Westbury Invest Trade (P) Ltd. This finding is contrary to the narration of the facts recorded by the Tribunal itself in the earlier stage of its order. Once the receipt of the confirmation letter is received and the identity of the existence of the company has not been disputed, the increase in share capital on account of share application of Westbury Invest Trade (P) Ltd. could not have been sustained on the Tribunal's own reasoning for deleting other like investments from other companies.
25. Coming to the other addition sustained on account of investment made by Umesh Kumar, the existence of the investor has been accepted even by the Income Tax Officer since he has responded to the letter issued by the Income Tax Officer. However, the investor has denied to have made any such investment.
26. This case is governed by Steller Investment Ltd.'s case (supra) on which the Tribunal has relied. Existence of Umesh Kumar has been established as shareholding is issued in his name. No effort was made to find out the real investor as to who has made investment in the name of Umesh Kumar. Hence, additions of increase in share capital on account of share application of Umesh Kumar also could not have been sustained.
27. In view thereof, this appeal is allowed. The additions made on account of increase in the share capital of the company on account of investment by Westbury Invest Trade (P.) Ltd. amounting to Rs. 2 lakhs and by Mr. Umesh Kumar amounting to Rs. 1 lakh are deleted. To that extent, the Tribunal's order is set aside in this appeal.
28. No order as to costs.