TaxTMI 
TaxTMI 
2012 (9) TMI 579
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee. The whole share application money was received during the year and shares were allotted. Query was raised in respect to share application money, reserve and surplus and unsecured loans. Assessee in his reply dated 29.07.2009 filed copy of accounts of share holders and confirmation letters of loans. In further reply dated 16.11.2009 assessee submitted details of share application money. On the basis of this position of share money is appended as under :- Name of the allottee Address and occupation of the allottee No. of shares allotted Value of share @ Rs. 10 each Value of premium @Rs.90 Total value paid by the allottee Udha Commercial (P) Ltd. 207 Mahashr Devendra Road, 6th floor, Room no. 107, Kolkata WB 700007 16000 Rs. 1,60,000/- Rs. 14,40,000/- Rs. 16,00,000/- B.Jhanwar & Company Pvt. Ltd. ----do----- 10000 Rs.1,00,000/- Rs.9,00,000/- Rs.10,00,000/- Shri Ranu Tiwari 35, Arvind Nagar, Ujjain 45600 1000 Rs.10,000- Rs. 90,000/- Rs. 1,00,000/- Smt. Priyanka Chouhan Govind Bhawan, Dhaba Road, Ujjain. 1000 Rs. 10,0001 Rs. 90,0001- Rs. 1,00,000/- Shri Suresh Kumar Mehta S/o Shri Dalpatsingh Mehta Director H.No. 143A, Ramchandr Nagar, Extension, Indore 5000 Rs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ector of M/s. Udhav Commercial Pvt. Ltd. , in a marriage party at Bombay where the negotiation regarding application for shares were made. But how he met the persons of Ujjain, who applied for shares, is not in his memory. It is worth mentioning here that during assessment proceedings on enquiry the Assessing Officer found that so called share holders of Ujjain were provided funds, for purchase of shares that too on premium, by associate concerns of the promoters of this company only. After this, information u/s 133(6) of the IT Act vide letter dated 16/11/2009 was called for by the Assessing Officer for counter verification of the allotment of shares on premium from the concerned parties. The notices were sent through speed post and regarding service of these notices the following position emerged: 1. Udhav Commercial Pvt. Ltd. 207- Maharishi Vevendra Road, 6th floor. Road No. 107 Kolkata-700007 (W.B.) Dispatch No. 2776 Returned back by postal authority un served with remarks "left" 2. M/s B.Jhanwar & Company, Pvt. Ltd. 207-Maharishi Devendra Road, 6th floor. Road No. 107 Kolkata-700007 Dispatch No.2777 Returned back by postal authority un served with remarks" left" 3. Shri Ran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion emerged as under - 8.1. M/s. B. Jhanwar & Company, Pvt. Ltd. 207- Maharishi Devendra Road, 6th floor. Road No. 107 Kolkata-700007 (W.B.) The under signed along with Shri Manohar Choukde Inspector of this office, visited Kolkata on 17/12/2009 There was no sign-board of company on the given address on the premises. Enquiry was made from the neighbor of the locked room i.e. address of the share holder company "207- Maharishi Devendra Road, 6th floor. Road No. 107, Kolkata 700 007 (W.B.), " Shri Radheshyam Agrawal Prop. of Shri Shankar Trading Company at room No. 119. He stated that this office (which was not company) is closed about two years ago and we have never listened the name of company M/s B. Jhanwar & Co. Pvt. Ltd. nor any signboard was found fixed there since last 5 to 6 years. Since he was running his business from that place since last 8 years, he had not noticed this company on this address an time. The result of the above enquiry emerged that the given address of the company M/s B. Jhanwar & Co. Pvt. Ltd. was bogus and neither any activity was being run by the so called company from that place nor at present any business is being continued. 8.2. Udhav Commercial P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are money by rotating it through various companies and in the last showed share application money in the name of the assessee company. It is pertinent to mention here that Vaibhav Cotton Pvt. Ltd. Company was incorporated on 12.09.06 as a private limited company and it was not having any business done. There was also no such good will of this company that its shares could be sold on a premium of Rs. 90/- against face value of Rs. 10/- . This is also evident from the worth of the company which is disproportionate to the premium received. This fact was also perused from the entries in bank account of the share holders. It was revealed that huge in flow and out flow fund was without any business rational in the accounts of the company, and it clearly leads to the conclusion that such companies were used as conduit for floating of unaccounted funds. Their existence was mere on paper and filing of return did not established that a genuine company engaged in the business as claimed was in existence. The reliance is placed on the following decisions also :- The Calcutta High Court has held in CIT Vis Precision Finance company Pvt. Ltd. (1994)208 ITR 465 that it is not sufficient for an ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rthiness of the shareholders, therefore, added entire amount u/s 68 of the Income-tax Act, 1961. 5. By the impugned order, the ld. CIT(A) confirmed the addition after having the following observations :- "4.0 Facts on record, findings given by the Assessing Officer and the contentions put forward by the appellant are very carefully taken into consideration. The relevant facts are noticed at the first instance. The Assessing Officer as per details extracted hereunder:- Name of the Share applicant/al lottee PAN No. No. of shares allotted Value of shares @ 10/- per share Value of Premium 90/- per share Total amount Udhav Commercial (P)Ltd. AAACU5785 16,000 1,60,000 14,40,000 16,00,000 B.Jhanwar & Co (P) Ltd. AABCB0555B 10,000 1,00,000 9,00,000 10,00,000 Shri Ranu Tiwari AFUPT0067R 1,000 10,000 90,000 1,00,000 Smt.Priyanka Chouhan Not liable to file return since below taxable income 1,000 10,000 90,000 1,00,000 Total 2,80,000 25,20,000 28,00,000 4.01 The AO as per detailed findings recorded in assessment order by conducting local inquiries at Kolkatta on page 5 & 6 of the assessment order has established that no genuine company as such existed at the given....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n such marriage, party, without prior intimacy and knowledge, investment in shares of private limited company which is yet to start its operation cannot be discussed and finalized leading to substantial investment of Rs. 16 lakh and Rs.10 Iakhs on the part of these two Kolkata based companies. Thus, these facts clearly bring on record that the share capital contribution was nothing but an arranged affair. 4.1 Now, the legal contentions are examined. It is worthwhile to note that the observation made by Hon'ble Supreme Court while dismissing SLP in the case of Lovely Exports as has been reported as judgement delivered by the CTR at 216 CTR 295 has been simply stated to be dismissal of SLP in the oldest and still considered to be most leading and reliable Indian Tax Reporter on page 319 ITR 5,6 (statute) in following manner: "Share application moneys received by company 11.1.2008 - Their Lordships S.H. Kapadia and B. Sudershan Reddy JJ dismissed the Department's Special leave petition against the judgement dated November 16, 2006 of the Delhi High Court in I.T.A. No.953 of 2006 reported in 299 ITR 268, whereby the High Court affirmed the deletion by the Tribunal of additions made ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'ble Delhi High Court has observed in the same judgement on page 278 of the report. " Returning to Sophia Finance [1994] 205 ITR 98P (Delhi) the Full Bench which was now presided over by B.N.Kirpal J. (as the Chief Justice of India then was) had enunciated that section 68 reposes in the Income-tax Officer or the Assessing Officer the jurisdiction to inquire from the assessee the nature and source of the sum found credited-in itsbooks of account. If the explanation offered by the assessee 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 assessee in its books of account, since the wording of section 68 is very wide. The full Bench opined that (page 105): "If the shareholders exist then, possibly no further enquiry need be made. But if the Income-tax Officer finds that the alleged shareho1ders do not exist then, in effect, it would mean that there is no valid issuance of share capital receipt. Shares cannot be issued in the name of non-existing persons ... If the shareholders are identified and it is established that they have invested money in the purchase of shares....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 68 of I. T. Act, which remain totally unaltered and unamended in more than 46 years of its existence on statute, reads as under: 68 Cash Credits Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be, charged to income tax as the income of the assessee of that previous year. " 4.1.5 The proposition of law laid down is very clear and well established by various judicial decisions. The landmark judgement elucidating the nature of onus cast u/s 68 on an assessee is that of Shankar Industries v. Addl. CIT (1978) 114 ITR 689 (Cal). The principle laid down is to be found on page 698 in the following words :- "We would like to observe that the law on this point is now well settled. It is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of this creditor, the capacity of such creditor to advance the money and, lastly, the genuin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... authority to come to an independent and unbiased finding as to the genuineness of the transaction. It is true that the tax authority is not entitled to reject the assessee's case summarily or arbitrarily or without sufficient reason. It is true that the authority's duty is to examine all the materials carefully and objectively. But it ; is found that the authority concerned after careful consideration of all relevant materials has come to the conclusion that the assessee's case of a loan from a third party cannot be accepted it is not open to this court to disturb the finding in reference under section 66(1)." This precisely provides the concept of "shifting of onus" in ca case covered by Section 68 of the Act. 4.1.8 If the above principles of statutory onus on an assessee u/s 68 and of the shifting of such onus from the assessee on to the Assessing Officer are applied to any case including the present appellant's case, the following position shall emerge. Prima facie proof of the three ingredients and that too cumulatively shall have to be examined at three different stages one after the other but if an assessee fails to establish at the first stage, the identity of the credito....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ficer again rushing on its own to the banks where also accounts are opened in the such company's names. Further, the identity, capacity and genuineness aspects are not water tight compartments. An assessee's explanation of the nature and source of the credits cannot be entertained and held by the Assessing Officer as satisfactory unless and until the ground reality i.e. the de facto existence of the creditor is first established prima facie paving the way for the Assessing Officer to examine further the capacity and genuineness aspects. Hence merely based on arranged affairs and supporting documents, the identity cannot be said to be established, and in many case NOT the CAPACITY and GENUINESNESS of transaction. The Assessing Officer as discussed above has clearly established the two individuals to benami person on behalf of one of the Director. 4.2 It has been further established by a series of decisions that the conclusion whether a cash credit in the books of account of an assessee is properly explained or not is a question of fact [CIT vs. Nelliappan, (1967) 66 ITR 722 (S.C.); CIT V. Manick Sons, (1969) 74 ITR 1, 6(S). Also see, Jadunandan Sahu Deokisanaram vs. CIT, (19....
X X X X Extracts X X X X
X X X X Extracts X X X X
....avnagar Cotton Mills Limited, (1976) 104 ITR 493 (Bom); Roshan Di Hatti v. CIT, (1977) ITR 938 ( S.C.); CIT V. Daluram Pannalal Modhi,(1981) 129 ITR 398 (MP). For the purpose of bring such amount to tax, the enquiry whether the income was from a business activity or from other sources is not relevant [CIT v. Durga Prasad More, (1969), 72 ITR 807 ( S.C.)] The principle laid down in CIT vs. M. Ganapathi Mudaliar, (1964) 53 ITR 623 (S.C.), that once it is found that a receipt by the assessee was income of the assessee it is not necessary for the revenue to locate its exact source applies alike to cases in which an entry is found to the books of account of the assessee as to cases in which no entry is found [CIT v. Durga Prasad More,(1969) 72 ITR 807 (S.C.) . 4.3 Thus, to recapitulate, the correct position that emerges is that onus lies on the assessee to establish identity and creditworthiness of the loan/cash credits and genuineness of the transaction and in each case it has to be decided on consideration of totality of facts and circumstances of the case whether such onus has been discharged by the assessee or not and there is no burden on the Assessing Officer to link up or establ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sion is provided against an order passed by a court, tribunal or any other authority before a superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges is the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law. (ii) The Jurisdiction conferred by article 136 of the Constitution is divisible into two stages. The first stage is up to the disposal if the prayer for special leave to file an appeal. The second stage commences if and when the leave to appeal is granted and the special leave petition is converted into an appeal. (iii) The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it. Under article 136 of the Constitution, the Supreme Court may reverse, modify or affir....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... order or decision of a superior forum" is often employed, as a general rule, the judgment or order having been dealt with by a superior forum and having resulted in confirmation, reversal or modification, what merges is the operative part, i.e. the mandate or decree issued by the court which may have been expressed in positive or negative form. The application of the doctrine depends on the nature of the appellate or revisional order in each case, the scope of the statutory provisions conferring the appellate or revisional jurisdiction and the content and subject matter of challenge laid or which could have been laid. Apart altogether from the merits of the grounds for rejection, the mere rejection by a superior forum resulting in refusal to exercise its jurisdiction which is invoked cannot by itself be construed as the imprimatur of the superior forum on the correctness of the decision sought to be appealed against. Article 141 of the Constitution of India speaks of declaration of law by the Supreme Court: for a declaration of law there should be a speech, i.e. a speaking order. A decision which is not express and is not founded on reasons nor on consideration of the issu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... MP) 429 has held as under: "Without considering that the payments were made by each creditors by first deposition a sum of Rs. 5,00,000/- and them issuing a cheque for the purchase of the shares and that the companies were not found to be in existence, the Tribunal has hastened to come to the conclusion that addition was not justified. In coming to this conclusion, the Tribunal has observed that since AO had himself examined the bank accounts of three subscribing companies and found that there were numerous transactions, the genuineness of the transaction could not have been assailed. Section 68 enjoined the assessee to offer an explanation about the nature and source of the sum found credited in his books and if the explanation was not satisfactory, the amount can be credited and charged to income as income of the assessee. Since the assessee, though tried to explain the genuineness of the credit on the basis of letters of confirmation, it could not be explained as to how the transaction was materialized when the companies were not in existence and the amount was paid by cheque only on the date on which the amount was credited to the account of the company. It was for the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4.5 Section 3 of Companies Act, 1956, defines "private company" as under: (iii) "private company" (means a company which has a minimum paid up capital of one lakh rupees or such higher paid up capital as may be prescribed, and by it articles, -] (a) restricts the right to ............. (b) limits............................. (c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company: (d) Prohibits............] ................... As a single member Clause (c) as above, makes it clear that the subscribers to shares of private company cannot be from public. It, therefore, follows that the subscribers to shares of private company can be only private persons. Such private persons must invariably be persons of confidence and acquaintance of directors of private company and there should be normally, no difficulty in producing them before the AO. And in case, they are not produced, the natural corollary is that the real position is not the same as emerges from papers and documents furnished in this behalf. The company very tactfully and intelligently has tried to overcome the condition of inviting subscription from publi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....28 lakhs is hereby confirmed." 6. Against the above order, the assessee is in further appeal before us. 7. We have considered the rival submissions and have gone through the orders of the authorities below. We have also deliberated on the case laws cited by ld. Authorized Representative and ld. CIT DR during the course of hearing before us in the context of factual matrix of the case. From the record, we found that the assessee company was unable to prove identity of Kolkata based company which have invested money in assessee's share at a premium of Rs. 90/- and which were bought back by the promoters/director of assessee in the very next year at a discount of 90 %. Detailed inquiry has been made by the Assessing Officer not only by sending letters but also by personally visiting the address given by the assessee at Kolkata. The Assessing Officer alongwith income tax inspector, Shri Manohar Chokude personally visited Kolkata on 17.12.2009. On inquiry they found that there was no sign board of the company on the given address at the premises. Enquiry was also made from the neighbours of the locked room i.e. address of the shareholders company and it was stated by the neighbor that....