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TMI Blog2011 (1) TMI 194X X X X Extracts X X X X X X X X Extracts X X X X ..... it does not follow that the amount of share capital was the undisclosed income of the assessee. Even the correct Bank statements as claimed by the AO reveal that the assessee has received cheques from the shareholders - no addition could be made Genuineness of the transactions, identity of the share applicants, creditworthiness - Held that: addition was rightly deleted by the CIT (A) and the Tribunal. Requisite documents were furnished showing the existence of the shareholders from bank accounts and even their income tax details. From bank accounts of these shareholders, it was found that they had deposed certain cash and source thereof was questionable. The AO should have made further probe which he failed to do. Moreover, remedy with the Department lies in reopening the case of these investors and the addition cannot be made in the hands of assessee. Unexplained investment - the assessee had not given satisfactory evidence to discharge the onus. It had merely given names of the parties without anything more. That would not be sufficient compliance. Even the bank statement of the assessee which was submitted has not been proved. - assessee had not been able to discharge the onu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian Companies Act are concerned, whether private limited or public limited companies, they raise their capital through shares, though the manner of raising the share capital in the private limited companies on the one hand and public limited companies on the other hand, would be different. In the case of private limited companies, normally, the shares are subscribed by family members or persons known/close to the promoters. Public limited companies, on the other hand, generally raise public issue inviting general public at large for subscription of these shares. Yet, it is also possible that in case of public limited companies, the share capital is issued in a close circuit. 5. When the companies incorporated under the Companies Act raise their capital through shares, various persons would apply for shares and thus give share application money. These amounts received from such shareholders would, naturally, be the sums credited in the books of account of the assessee. If the AO doubts the genuineness of the investors, who had purportedly subscribed to the share capital, the AO may ask the assessee to explain the nature and source of those sums received by the assessee on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the Company. 7. Taking note of the earlier judgment of Full Bench of this Court in the case of Commissioner of Income Tax Vs. Sophia Finance Ltd. [(1994) 205 ITR 98], the Court observed that the Full Bench had enunciated that Section 68 reposes in the Income-tax Officer or AO the jurisdiction to inquire from the assessed the nature and source of the sum found credited in its Books of Accounts. If the Explanation preffered by the assessed is found not to be satisfactory, further enquiries can be made by the Income-tax Officer himself, both in regard to the nature and the source of the sum credited by the assessed in its Books of Accounts, since the wording of Section 68 is very wide. The Full Bench opined that 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. If the shareholders are identified and it is es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout more, against the assessed. (7) The Assessing Officer is duty-bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and the veracity of the repudiation. 10. By this common judgment, the Division Bench decided these appeals of which one appeal related to Lovely Exports P. Ltd.. Against the said judgment, Special Leave Petition was preferred, which was dismissed by the Supreme Court vide orders dated 11.01.2008 and is reported as Commissioner of Income Tax Vs. Lovely Exports (P) Ltd. [216 CTR 195 (SC)]. The Court while dismissing the SLP recorded some reasons as well albeit in brief, which is as under: 2. Can the amount of share money be regarded as undisclosed income under s.68 of IT Act, 1961? We find no merit in this Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment . 11. It is clear from the above that the initial burden is u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer to make proper investigation and reach the shareholders. The Assessing Officer did nothing except issuing summons which were ultimately returned back with an endorsement not traceable . In our considered view, the Assessing Officer ought to have found out their details through PAN cards, bank account details or from their bankers so as to reach the shareholders since all the relevant material details and particulars were given by the assessee to the Assessing Officer. In the above circumstances, the view taken by the Tribunal cannot be faulted. No substantial question of law is involved in the appeal. In the result, the appeal is dismissed in limini with no order as to costs. (emphasis supplied) 16. The Court thus clearly held that once documents like PAN Card, bank account details or details from the bankers were given by the assessee, onus shifts upon the Assessing Officer and it is on him to reach the shareholders and the Assessing Officer cannot burden the assessee merely on the ground that summons issues to the investors were returned back with the endorsement not traceable‟. Same view is taken by the Karnataka High Court in Madhuri Investments Pvt. Ltd. Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot for the assessee company to establish but it is for the department to enquire with the investor about their capacity to invest the amount in the shares. Therefore, we are of the view that the substantial questions of law framed in this appeal are to be answered against the revenue and in favour of the assessee. Accordingly, this appeal is dismissed. 18. Rajasthan High Court had an occasion to deal with the submission of the Revenue predicated on Benami transactions in the case of Commissioner of Income Tax Vs. AKJ Granites (P) Ltd. reported as 301 ITR 298 (Raj.) and the arguments were dealt with in the following manner: 3. So far as question No. 1 is concerned, it is stated by learned counsel for the appellant that the issue embedded in the said question has already been decided by this Court and governed by the ratio laid down in Barkha Synthetics Ltd. Vs. Asst. CIT (2005) 197 CTR (Raj.) 432. It has been pointed out that share applications are made by number of persons, may be in their own names or benami, but the fact that share applications received from different places accompanied with share application money, no presumption can be drawn that same belong to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not satisfactory the amounts were not of the nature of income. The CIT (A) confirmed the assessment. On further appeal, there was a difference of opinion between the two Members of the Appellate Tribunal and the matter was referred to the Vice President who concurred with the findings and conclusions of the AO and the CIT (A). On appeal, the High Court re-appreciated the evidence and substituted its own findings and came to the conclusion that the reasons assigned by the Tribunal were in the realm of surmises, conjecture and suspicion. On appeal to the Supreme Court, the Court while reversing the decision of the High Court held that the findings of the AO, CIT (A) and the Tribunal were based on the material on record and not on any conjectures and surmises. That the money came by way of bank cheques and was paid through the process of banking transaction as not by itself of any consequence. The High Court misdirected itself and erred in disturbing the concurrent findings of fact. While doing so, the legal position contained in Section 68 of the Act was explained by the Supreme Court by assessing that a bare reading of Section 68 of the Act suggests that (i) there has to be cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Investment Ltd. [(1991) ITR 287 (Del.)] where the increase in subscribed capital of the respondent company accepted by the ITRO and rejected by the CIT on the ground that a detailed investigation was required regarding the genuineness of subscribers to share capital, as there was a device of converting black money by issuing shares with the help of formation of an investment which was reversed by the Tribunal, this Court held that even if it be assumed that the subscribers to the increased share capital were not genuine, under no circumstances the amount of share capital could be regarded as undisclosed income of the company. This view was confirmed by theApex Courtin CIT Vs. Stellar Investment Ltd. [(2001) 251 ITR 263 (SC)]. 24. Having taken note of the legal position in detail, we now proceed to decide each appeal on the application of aforesaid principles. ITA No.2093 of 2010 ITA No.2095 of 2010 25. In both these appeals, the assessee is the same. Since these appeals pertain to two assessment years, viz., Assessment Year 2003-04 and Assessment Year 2004-05, that is the reason for two appeals though common issue is based on identical facts. 26. While makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the cheques were cleared. However, the parties were not produced in spite of specific direction of the AO instead of taking opportunities in this behalf. Since the so-called Directors of these companies were not produced on this ground coupled with the outcome of the detailed inquiry made by the Investigating Wing of the Department, the AO made the addition. This addition could not be sustained as the primary onus was discharged by the assessee by producing PAN number, bank account, copies of income tax returns of the share applicants, etc. We also find that the Assessing Officer was influenced by the information received by the Investigating Wing and on that basis generally modus operandi by such Entry Operators is discussed in detail. However, whether such modus operandi existed in the present case or not was not investigated by the AO. The assessee was not confronted with the investigation carried out by the Investigating Wing or was given an opportunity to cross-examine the persons whose statements were recorded by the Investigating Wing. 29. As regards discrepancies found by the AO in the bank statement, suffice is to mention that the bank statements that were filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved on 22 out of 30 parties. Even remaining 08 persons did not respond. Local inquiry made through Inspector revealed that the parties did not exist at the given addresses. On inquiries from bank, the AO found various discrepancies in the statement sent by the bank and the statement produced by the assessee. Even some of the names given by the assessee were not the same as in the bank records. The AO confronted entire material to the assessee and allowed various opportunities. However, the assessee did not produce even a single party. Accordingly, the AO made an addition of Rs.99.18 lacs to the income of assessee on account of unexplained share capital under Section 68 of the Act. Similarly, the AO also made addition of Rs.3.10 lacs on account of unexplained credit under Section 68 of the Act. 32. The CIT (A) allowed the appeal and deleted the addition. After recording the findings that necessary documents to prove the identity of investors, creditworthiness and genuineness of the transactions were produced by the assessee, he was of the opinion that even when some discrepancies were found in the bank statement of these investors produced by the assessee, facts remain that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax details. From bank accounts of these shareholders, it was found that they had deposed certain cash and source thereof was questionable. The AO should have made further probe which he failed to do. Moreover, remedy with the Department lies in reopening the case of these investors and the addition cannot be made in the hands of assessee. 35. We accordingly dismiss this appeal. ITA No.514 of 2007 36. This appeal was admitted on the following question of law: Whether on the facts and in the circumstances of the case, the ITAT has erred in law in sustaining the addition of Rs.25,23,500 on account of receipt of share application money? 37. The facts leading to the admission of the aforesaid question of law are as follows: The assessee in the income tax return for the Assessment Year 1997-98 had shown receipts in the form of share money subscribed of 15% to whom the shares were later on allocated. Total money on this account received by the assessee was Rs.25,23,500. The investment in these shares was ranging from Rs. 1 lac to Rs. 2.5 lacs. In order to verify the genuineness of these transactions, the AO issued summons to these parties which were received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on it was admitted that they were small agriculturists and were cultivating the agricultural land after taking it on lease from other agriculturists. No evidence regarding the agricultural holdings were produced before the A.O. nor have they filed any evidence with regard to their financial soundness whereas the investment in shares were made between Rs.1 lakh to Rs.2.5 lakhs. Copy of the statement are (sic. is) placed on record and from its perusal one would find that all these 5 persons are of ordinary status and they have no means to invest a huge sum in shares with the assessee. 16. So far as the legal position and the judgment of the Apex Court in the case of Steller Investment Ltd. is concerned, we are of the view that the ratio laid down in the Steller Investment Ltd. is applicable only in those cases where the assessee is a limited company and the shares were quoted in stock exchange. Once the shares are quoted in stock exchange and the subscription is open to public at large, assessee cannot have control over the subscription and also cannot make a verification of the subscribers as subscription can be done by any person. But whenever the issue is subscribed without qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons who are produced are concerned, they are gone into and analyzed by the three Authorities below on the basis of which finding of fact is arrived at that neither their identity is established nor their capacity to invest this kind of money is proved. They are all agriculturists and had not produced a single document to support their version. This is a finding of fact and there is no reason to interfere with the same. Learned counsel for the Revenue had drawn our attention to view all these statements. One Mr. Sukh Lal Singh in his statement had stated that he had purchased the share of Rs.1,90,00. Out of the share money, he had paid Rs.70,000 out of his own source and Rs.1,20,000 was received by him from his friends and was paid in many installments. Likewise one Mr. Vijay Kumar who also purportedly purchased the share of Rs.1.90 lacs stated that the payments were made by him in cash in many installments. He also stated that he personally knew the Directors of the company and had very old relation with him. 43. On the basis of such statement without an iota of documentary evidence to support, we are of the opinion that the findings of the Authorities below cannot be treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed unverifiable. No comments can now be offered at this stage without necessary verification. Proof of identity produced at a later stage cannot be verified in the absence of concerned person original documents. 45. Order of the CIT (A) clearly demonstrates that this remand report was sent to the assessee who had submitted his reply dated 10.02.2004, which is even reproduced in the order and thereafter the CIT (A) discussed the same in the light of certain decision cited before him and came to the conclusion that the assessee had not given satisfactory evidence to discharge the onus. It had merely given names of the parties without anything more. That would not be sufficient compliance. Even the bank statement of the assessee which was submitted has not been proved. 46. For all these reasons, we are of the view that the assessee had not been able to discharge the onus ptomaine and addition was rightly made. We, therefore, answer the question in the negative and dismiss this appeal of the assessee. ITA NO.539 OF 2008 47. This appeal relates to penalty proceedings which were initiated against M/s. Vijay Power Generator Ltd. (appellant in the aforesaid ITA No.514 of ..... 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