2006 (2) TMI 240 - AT - Income Tax

Disallowance made by Assessing Officer u/s 43B - addition u/s 68 - unexplained share capital - interest on loan from public financial institutions (like RFC) - Not challenged the last addition in appeal before the CIT(A) - additional ground - difference of opinion between Hon'ble Members - Third Member Order - Whether the addition made on account of introduction of share capital was required to be deleted or matter required to be remitted to the Assessing Officer for examining the depositor and to verify the relevant facts from the assessment record of the shareholders? Learned JM - HELD THAT - Interest on loan from public financial institutions (like RFC) not actually paid was to be disallowed u/s 43B(d) of Income-tax Act. However aforesaid clause (d) was inserted in section 43B through the Finance Act, 1990 with effect from 1-4-1991. The aforesaid provision was not applicable in the assessment year 1989-90 involved before the Tribunal. He accordingly held that unpaid interest to Rajasthan Financial Corporation (RFC) could not be added back u/s 43B of the Income-tax Act. The Assessing Officer was duty bound to make assessment in accordance with law and therefore, could not make disallowance under a provision which was not at all applicable. Accordingly directed that addition made by the Assessing Officer be deleted. The learned AM did not agree with the order proposed by the learned Judicial Member. He noted that assessee did not challenge addition made by the Assessing Officer before the learned CIT(A). In fact the assessee had himself surrendered the amount in the revised return. He further observed that case pleaded as per the additional ground of appeal related to challenge of disallowance of an expenditure. It was not purely a legal claim not requiring investigation of facts. The matter, in the opinion of ld. Accountant Member, required to be considered u/s 36(1)(iii) of Income-tax Act. Addition - learned Accountant Member did not agree with the proposed order of the Judicial Member. In his view the matter relating to addition was required to be remitted to the Assessing Officer for examining the depositors and to verify the relevant facts from assessment records of these persons. Thereafter, the learned Accountant Member considered case of each of the 10 investors and held that assessee's request for summoning investors should have been accepted and Assessing Officer should have allowed adequate opportunity to the appellant to explain his case. The learned Accountant Member accordingly directed that appeal on this ground should be allowed for statistical purposes and matter remitted to the file of Assessing Officer for examination of witnesses and their assessment records. THIRD MEMBER ORDER - It is evident from above that in all the cases, except that of Shri Virendra Raj Lodha, the Assessing Officer got information about account of the creditors from their respective banks. Photo copies of bank statement of creditors obtained by the Assessing Officer are available on record. A perusal of aforesaid bank statements clearly show that apart from making investment with the assessee-company, these creditors made other deposits in their bank accounts and these accounts were regularly maintained. The creditors are also assessed to tax. Thus not only identity of the creditor but even capacity to advance funds has been proved on record. It is very difficult to agree and accept that on account of summary scheme adopted by the Department, and as scrutiny assessment was not made such assessment of the creditors should be carried in the case of the assessee. In my opinion, Assessing Officer was wrong in becoming Assessing Officer of the creditors in this case to carry on scrutiny assessments of creditors. Such sort of argument, in my humble opinion, has no legal justification. If the assessee had submitted a return and given detailed particulars of his assessment, like GIR No. etc., the same is entitled to proper weight. Having regard to the information collected by the Assessing Officer from banks of the creditors, identity of the creditors was fully established. The creditors were also found to be assessed to tax. Having regard to principle laid down by different Courts and noted, further investigation of the matter in the present case was not necessary. If any shareholder is found to have made unexplained investment, then addition of such investment is required to be made in the hands of the shareholder and not in the account of the assessee. It is true that Sh. Virendra Raj Lodha has not been shown to be assessed to tax but he had also made majority of investments F towards share capital through cheques. Particulars of amounts advanced through cheques are available in his accounts. The Assessing Officer in this case has not written anything about his bank account. His identity has also not been doubted. Thus, I see no justification to remand the case in respect of share application money advanced by Shri Virendra Raj Lodha. I accept the same as genuine. Hence, I agree with learned Judicial Member that there was no scope to make any addition of share application money in the hands of assessee-company. The ld Accountant Member in his proposed order has also raised an issue on distinction between public company and a private company. Two types of companies are differently treated under the Companies Act, for various purposes and said distinction is well-known. It has also been noted by the learned Accountant Member in the impugned order. But as far as share application money is concerned, the matter is required to be determined under section 68 of the Income-tax Act. If the identity of the creditor is established, then burden to prove that money advanced by creditor did not belong to him but to somebody else is on the revenue who has to find the real investor as per principle laid down by Their Lordships in the case of Barkha Synthetics Ltd 2005 (8) TMI 67 - RAJASTHAN HIGH COURT . In the light of above principle, distinction between a public and a private limited company is not very material, as far as introduction of share capital money is concerned. The question proposed by the learned Accountant Member should be taken to be answered in the above terms. Thus, I agree with the view taken by the learned Judicial Member on this point and hold that addition on account of share capital money was uncalled for and rightly deleted. There was no need to remit the case back to the Assessing Officer for examining the depositors and to verify relevant assessment records of the depositors. The matter should now be placed before the regular Bench for disposal in accordance with law.

Summary

Issues Involved:
1. Admission of Additional Ground under Section 43B.
2. Addition of Unexplained Share Capital under Section 68.
3. Difference in treatment between Public Limited Company and Private Limited Company under Section 68.

Issue-wise Detailed Analysis:

1. Admission of Additional Ground under Section 43B:

The appellant raised an additional ground challenging the disallowance of Rs. 2,15,364 under Section 43B for unpaid interest to Rajasthan Financial Corporation (RFC). The appellant argued that the provisions of Section 43B(d), which came into effect from 1-4-1991, were not applicable for the relevant assessment year 1989-90. The Judicial Member admitted this additional ground, citing it as a purely legal ground that did not require further factual investigation. The Judicial Member relied on the decisions of the Supreme Court in Jute Corpn. of India Ltd. v. CIT and National Thermal Power Co. Ltd. v. CIT, which allow the Tribunal to admit new grounds if they involve legal questions arising from facts already on record. The Judicial Member concluded that the Assessing Officer wrongly applied Section 43B(d) and deleted the addition.

However, the Accountant Member disagreed, stating that the additional ground required investigation into facts to determine if the liability pertained to the relevant year and if it was incurred wholly for business purposes under Section 36(1)(iii). The Accountant Member argued that the deduction should be examined by the Assessing Officer, as it was not a purely legal ground.

2. Addition of Unexplained Share Capital under Section 68:

The Assessing Officer added Rs. 5,01,129 as unexplained share capital, questioning the genuineness and creditworthiness of the shareholders. The assessee provided confirmations, GIR Nos., and bank statements to support the genuineness of the transactions. The Judicial Member found that the assessee had discharged its burden by providing sufficient evidence, including independent verification by the Assessing Officer from the shareholders' bankers. The Judicial Member relied on the Supreme Court's decision in CIT v. Orissa Corpn. (P.) Ltd., which held that once the identity of the shareholders is established, the burden shifts to the Revenue to prove otherwise. The Judicial Member also cited the Supreme Court's decision in CIT v. Steller Investment Ltd., which stated that share capital cannot be treated as undisclosed income of the company if the shareholders' identity is established.

The Accountant Member, however, argued that the matter should be remanded to the Assessing Officer for further investigation, as the assessee failed to produce the shareholders for examination. The Accountant Member emphasized the need to verify the creditworthiness and genuineness of the transactions, especially in a closely held company controlled by one family.

3. Difference in treatment between Public Limited Company and Private Limited Company under Section 68:

The Judicial Member opined that there is no difference in the applicability of Section 68 between Public Limited Companies and Private Limited Companies. The Judicial Member emphasized that once the identity of the shareholders is established, the burden shifts to the Revenue to prove that the investment is not genuine, irrespective of the company's status.

The Accountant Member, however, highlighted the distinction between Public and Private Limited Companies, noting that Private Limited Companies often involve close family and friends, making it essential to scrutinize the genuineness of share capital more rigorously. The Accountant Member suggested that the corporate veil could be pierced to uncover the true nature of the transactions, especially in tax matters.

Third Member's Decision:

The Third Member agreed with the Judicial Member on both issues. The Third Member held that the additional ground under Section 43B was a purely legal issue and could be admitted without further investigation. Regarding the addition of unexplained share capital, the Third Member found that the assessee had provided sufficient evidence to establish the identity and creditworthiness of the shareholders. The Third Member emphasized that the burden shifted to the Revenue to prove otherwise once the identity was established. The Third Member also agreed that there is no distinction in the applicability of Section 68 between Public and Private Limited Companies once the identity of the shareholders is established.

Conclusion:

The appeal was allowed in favor of the assessee, with the additional ground under Section 43B admitted and the addition of unexplained share capital deleted. The Third Member's decision aligned with the Judicial Member's view, emphasizing the importance of establishing the identity of shareholders and shifting the burden of proof to the Revenue.