2003 (3) TMI 53 - HC - Income Tax

Share subscriptions paid by cheque require verification of subscribers' identity and creditworthiness before assessing income additions

HC held that share subscriptions not paid in cash but by cheque required inquiry into subscribers' identity and creditworthiness. For 12 subscribers not ... Addition under section 68 - nature and sources of such fund - burden of proof - establish the identity, creditworthiness of the individual shareholders and genuineness of the investment recorded in the books of the company in their names - HELD THAT:- 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 the income-tax file number was given, it was for the Income-tax Officer to enquire into the same and find out the creditworthiness of the subscriber and genuineness of the transaction. If after making such enquiry, the Income- tax Officer would have come to the conclusion against the creditworthiness of the subscriber and genuineness of the transaction, then the question would have been otherwise. In our view, in the present case, so far as the 12 persons who were not found at the given addresses on enquiry, it can be said that the identity of those persons has not been established. Therefore, the second stage of ascertaining their creditworthiness or the genuineness of the transaction is not required to be gone into and on 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 income-tax 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 income-tax 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 income-tax 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. The income-tax 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 Assessing Officer 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 three 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. Issues Involved:1. Justification of the Tribunal in upholding the appellate order confirming the addition under section 68 of the Income-tax Act.2. The burden of proof on the assessee to establish the identity, creditworthiness, and genuineness of the shareholders.3. The extent and nature of the enquiry required by the Assessing Officer under section 68.4. The validity of legal precedents cited by both parties.Detailed Analysis:1. Justification of the Tribunal in Upholding the Appellate Order:The primary issue was whether the Tribunal was justified in upholding the appellate order of the Commissioner of Income-tax (Appeals), which confirmed the addition of Rs. 8,70,387 under section 68 of the Income-tax Act. The Tribunal, Commissioner (Appeals), and Assessing Officer treated part of the receipts as income from undisclosed sources under section 68, as the creditworthiness of the shareholders and the genuineness of the investment remained unestablished. The assessee had disclosed the names and addresses of the subscribers, but the Assessing Officer found discrepancies in the responses from the subscribers, leading to the conclusion that the subscriptions represented concealed income.2. Burden of Proof on the Assessee:The assessee argued that they had discharged their burden by providing sufficient evidence, including the names, addresses, and income-tax file numbers of the subscribers. It was contended that once this burden was met, it was the Assessing Officer's duty to scrutinize the evidence. The court noted that under section 68, the burden lies on the assessee to explain the nature and source of the funds. The explanation must be satisfactory to the Assessing Officer, who has the power to treat unexplained credits as income from undisclosed sources. The court emphasized that the Assessing Officer's satisfaction must be reasonable and based on materials, not perverse.3. Extent and Nature of Enquiry by the Assessing Officer:The court explained that the Assessing Officer's power under section 68 is not absolute and must be exercised with due consideration of the evidence provided by the assessee. The officer is required to conduct a reasonable enquiry, which may include examining the materials, seeking further information, and verifying the creditworthiness and genuineness of the transactions. The court criticized the Assessing Officer for not adequately verifying the income-tax file numbers provided by the assessee, which could have established the identity and creditworthiness of the subscribers.4. Validity of Legal Precedents:The court referred to various decisions to elucidate the principles under section 68. It clarified that the decision in CIT v. Stellar Investment Ltd. [1991] 192 ITR 287 (Delhi) was not good law after the Full Bench decision in CIT v. Sophia Finance Ltd. [1994] 205 ITR 98 (Delhi). The court also discussed the Supreme Court's stance in CIT v. Orissa Corporation P. Ltd. [1986] 159 ITR 78 (SC) and other relevant cases, emphasizing that the Department must act reasonably and cannot reject a good explanation without proper enquiry. It was highlighted that the identity of the shareholders must be established, and the genuineness of the transaction must be verified through reasonable enquiry.Conclusion:The court concluded that the Assessing Officer had not conducted a thorough enquiry into the creditworthiness and genuineness of the transactions. It was incumbent on the officer to verify the income-tax file numbers provided by the assessee. The court answered the reference in the negative, in favor of the assessee, and remanded the case for fresh decision by the Tribunal. The Tribunal was directed to remit the matter to the Assessing Officer for proper enquiry and to decide the matter within a specified timeframe.Operative Portion:The order of the Tribunal was set aside to the extent that it did not adequately consider the evidence provided by the assessee. The case was remanded for fresh enquiry and decision, with specific directions for timely resolution.