1992 (2) TMI 4 - HC - Income Tax

Section 263 revision upheld for lack of enquiry into share capital identity, genuineness and creditworthiness in assessment

The HC held that the Commissioner validly exercised revisional jurisdiction under section 263 of the Income-tax Act, 1961, as the original assessment ... Private Company - genuineness and creditworthiness of the persons who subscribed to the equity capital of the assessee-company - erroneous in so far as it was prejudicial to the interests of the Revenue - Whether, the Tribunal was justified in law in annulling the order under section 263 of the Income-tax Act, 1961, passed by the Commissioner of Income-tax ? - HELD THAT:- We do not find any reason why the Income-tax Officer will be precluded from making an enquiry where such enquiry is called for on the facts and in the circumstances of a case. Whether or not ultimately the shareholder fails to disclose the income out of which the shares of the assessee-company were acquired will be for the Assessing Officer to deal with, depending on the facts and circumstances of the case. Before any sum is added as the undisclosed income of the assessee-company, a link has to be established between the company and the shareholders' unaccounted money and, unless such link is established, it may not be possible to sustain the assessment ultimately. It is one thing to adjudge the validity of an assessment, but another to say as to what procedure should be followed by the Assessing Officer in making the assessment of the company. In our view, on the facts of this case, it cannot be said that the Assessing Officer has no jurisdiction to ask for information from the shareholders regarding the source of investment made in the company. As a matter of fact, the Commissioner of Income-tax, in this particular case, came to the conclusion on the facts that the matter relating to shareholders and their subscription to the shares of the assessee-company was not looked into by the Assessing Officer while framing the assessment relevant to the subsequent assessment year and it was found that the Assessing Officer issued summons to all the 34 persons to appear before him and to make depositions in this connection. Out of that, 13 notices came back unserved with the postal remark 'not known'. With respect to 17 other persons, though the summons was served, they did not appear and they simply sent letters confirming their subscription to the share capital of the company. It was also seen that the letters were written on similar papers and typed in the same typewriter. No acknowledgment or reply was received from six others. The examination of records by the Commissioner revealed that there was no existence of N. K. Trading Company, at 132, Cotton Street, where Atmaram Goel and Mahendra Kedia were stated to be working. They could not also produce any document to show that they were the employees of N. K. Trading Co., and that they were receiving salaries from the alleged firm in the year under reference. The Income-tax Officer only enquired of six of the shareholders. Having regard to all these facts, if the Commissioner was of the view that the assessment was not made after proper and detailed enquiries which should have been made before the subscription on account of share capital was accepted, it cannot be said that the conclusion of the Commissioner on these facts is erroneous. In our view, the Tribunal decided the question purely on a question of law and not on the facts found by the Commissioner of Income-tax. Issues Involved: The judgment involves a reference under section 256(1) of the Income-tax Act, 1961 for the assessment year 1986-87, questioning the validity of an order under section 263 of the Act.Summary of Judgment:Issue 1: Validity of Order u/s 263 of the Income-tax Act, 1961The Commissioner of Income-tax initiated proceedings under section 263 based on inadequate scrutiny of the genuineness and creditworthiness of shareholders by the Assessing Officer. The Commissioner found discrepancies in the assessment process, such as lack of detailed inquiries and examination of shareholders. The Commissioner's decision was influenced by the case law of Gee Vee Enterprises [1975] 99 ITR 375 (Delhi). The Tribunal, however, disagreed with the Commissioner's assessment, stating that the assessment order was not erroneous or prejudicial to the Revenue's interests.Issue 2: Authority of Assessing Officer to Inquire into Shareholders' InvestmentsThe High Court observed that the Assessing Officer has the jurisdiction to inquire into the source of investment of shareholders in a company. The Court highlighted the importance of establishing a link between shareholders' unaccounted money and the company's undisclosed income before making any additions to the company's income. The Court emphasized that the Assessing Officer's inquiry should be based on the facts and circumstances of each case.In conclusion, the High Court ruled in favor of the Revenue, stating that the Commissioner's decision was not erroneous based on the facts presented. The Court emphasized the importance of proper inquiries into shareholders' investments and upheld the validity of the Commissioner's order under section 263 of the Income-tax Act, 1961 for the assessment year 1986-87.