TaxTMI 
TaxTMI 
2011 (6) TMI 841
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....m alleged shareholders. 3. The Ld. CIT(Appeal) erred in holding that your app could not established (sic.) the exceeding, creditworthiness and genuineness of the shareholders both at the assessment stage and at the appellate stage. 4. The Ld. CIT(Appeal) erred in confirming addition of Rs. 5956000/- being share application money received from various shareholders. 2.1. Facts in brief as emerged from the corresponding assessment order passed 143(3) r.w.s. 255(4) of the I.T.Act, 1961 dated 31.3.2005 were that for the year under consideration in assessee's case the Income Tax Appellate Tribunal Ahmedabad "B" Bench bearing ITA No.4173/Ahd/95 vide its order dated 22.07.2003, reported as 90 ITD 170 (Ahd.)(TM), had set aside the order and restored the matter back to the file of AO. This was a Third Member decision and the Respected Member has opined as under:- "8. I have considered the rival submissions and gone through the record. Difference of the two Members in this case is whether the amount credited by the assessee in share capital in promoter's quota of Rs. 59,56,000 is to be deleted on the material on record or it requires to be set aside for further verification and....
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....fficiently thereof in the light of the provisions of s.68 of the Act, the applicability of which is agreed to by both the Members." 2. Since the matter was restored back to the file of the AO, therefore, complying with those directions the AO had made the requisite enquiries again, as is evident from the impugned assessment order now under appeal. The AO had made an elaborate discussion about the notices sent to several share applicants. It is worth to mention that on the basis of the compliance made the A.O. had kept those investors under different categories. The First category is of those investors who have made the proper compliance therefore at the first round itself as per the original assessment their investment was accepted. Second category was stated to be of those investors to whom letters were sent but received back un-served as they were not found to be available at the address given in the application form. In this category, there were 18 persons, each of them have invested Rs. 10,000/-. List of these 18 persons is as per page No.2 of the assessment order, for the sake of brevity, need not to reproduce the entire list. The Third category are in respect of those inve....
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....d its onus. It has also informed that in respect of an amount totalling to Rs. 18,41,000/- the subscribers were very small and made investment in the range of Rs. 5,000/- to Rs. 19,000/-. However, they were capable for investing the amount and identifiable. In this regard, it is worth to reproduce some of the observation of the AO through which it could be gathered that some of the investors have furnished their confirmations and also furnished supporting evidence. The documentary evidences in respect of an amount of investment of Rs. 23,05,800/- was stated to be available because those share applicants were the friends and relatives of the Directors. Letters to those 21 persons were issued and their confirmations were received by the AO as is noted vide following paragraph:- "It was further claimed that the confirmations were filed by the said persons. No doubt the letters sent by this office were received back with the remark that "I confirm". But perusal of these confirmatory letters indicate that they have simply confirmed that they have made investment in shares and documentary evidence in support of their claim has not been filed. Confirmation from bank regarding the in....
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....t furnish the confirmations with regard to the investment of share holders and the sources of acquisitions of shares. So far as the existence of alleged share holders is concerned, the appellant could not establish even the existence, creditworthiness and genuineness of the share holders both at the assessment stage and at the appellate state." "8. As per the direction of Hon'ble ITAT, the appellant had been given proper opportunity of being heard to prove the creditworthiness of the individual share holders and consequently the genuineness of the investment recorded in the books of account in their names but the appellant failed to discharge its onus either one way or the other by taking plea that share holders are from different places and it would not be possible to present them before the Assessing Officer. In the case of CIT vs. Precision Finance (P) Ltd. [208 ITR 465], the Hon'ble Calcutta High Court has held that "it is for the assessee to prove the identity of the creditors and their creditworthiness and genuineness of the transaction. Mere furnishing of particulars is not enough". The decisions of Hon'ble Delhi High Court and Calcutta High Court [supra] a....
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....AO was expected to proceed in the light of the direction given by the Respected Coordinate Bench vide order cited supra dated 22/07/2003. Primarily, the Tribunal has made an observation that the submission of share application forms by itself did not establish the identity of the allottees unless proved by the confirmations of the parties. Therefore, the Tribunal has left it to the assessee as to how to gather and collect the requisite information. On the other hand, the AO was directed to re-adjudicate the issue on the basis of the material to be brought on record. We are of the view that because of the said restoration, as directed by the Respected Third Member, this assessee got a good opportunity to place on record the requisite information. Now we shall examine the factual aspect in respect of the funds collected and the efforts made by the assessee to establish the credentials of those investors as prescribed u/s.68 of the I.T. Act. As a matter of fact, the share application money was collected as a private placement out of promoter's quota. Facts have also revealed that, in this regard, the assessee-company has invited friends and relatives of the Directors, therefore, the s....
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....il investor participation. Secondly, even though SEBI guidelines bar soliciting of subscription from the public, in practice issuers solicit through circulars, marked 'for private circulation only' form persons other than friends, relatives and business associates of issuer. This was the reason why the informal group appointed by the High Level Committee recommended that private placement resulting in subscription by 100 or more persons should be treated as public issue."unquote. On one hand, the SEBI has tried to protect the interest of the small investors, however, on the other hand, the SEBI has also sent signal to watch carefully the private placement. From the point of view of the Income Tax Department the apprehension is about the introduction of black money in the name of private placement by introducing the bogus names of several small investors. This apprehension of the Revenue Department was a cause of concern and in the past dealt with by the Hon'ble Courts and those decisions are to be referred to arrive at the correct conclusion. But from the side of the assessee, it was quoted with the purpose that if the placement is high in number as the subscribers are more than....
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....t is established that they have invested money in the purchase of shares, then the amount received by the company would be regarded as a capital receipt and to that extent the observation in Stellar Investment Ltd.(supra) was held as correct. The Hon'ble Full Bench has further said that if the subscribers to the capital were not genuine, then under no circumstances the amount of share capital be regarded as disclosed income of the company. It was a case of a limited company in the business of stocks and financing. By invoking the provisions of section 263 the Commissioner has arrived at the conclusion that there was lack of enquiry by the ITO. It was held that it was the duty of the ITO to enquire into the genuineness of the shareholders and directed to enquire whether the so-called shareholders were actually in existence or not. The Tribunal has found that the company had filed a large number of enclosures alongwith its return including the list of shareholders, forms containing the full addresses as well as the allotment letters before the ITO. The Tribunal came to the conclusion that the company was incorporated and the money was received immediately on incorporation would show ....
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....he previous year in which the entry is made in the book of account. Since in the present appeal, facts have revealed that no explanation was offered and the notices could not be served then the provisions of section 68 were invoked to assess the impugned amount in the hands of the assessee. 6.3. Thereafter, the aforesaid decision of Stellar Investment Ltd. has reached before the Hon'ble Supreme Court and vide an order dated 20/07/2000 titled as CIT vs. Stellar Investment Ltd. 251 ITR 263(SC) the question as referred by the Revenue was not admitted and held that the Tribunal came to the conclusion on facts hence no interference was called for. 6.4. From the side of the assessee, a decision of Hon'ble Supreme Court in the case of Lovely Exports Pvt.Ltd. 216 CTR 195 dated 11/01/2008 is cited. In this case the SLP of the Revenue Department was dismissed, but an important observation was made 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. Relevant portion reproduced below:- "ORDER - BY TH....
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.... particular question of law or lays down the ratio through conscious adjudication. Agreement with the finding of fact without adverting to the ratio laid down does not create a precedent. In order to support this view, we may refer to the decisions in Municipal Corporation of Delhi v. Gurnam Kaur (1989) AIR 1989 SC 38 (para.11); Gangadharan vs. Janardhana Mallan AIR 1996 SC 2127 (para-9) and Director of Settlement v. M.R. Apparao (2002) (4) SCC 638,. 650 (para 7). We are, therefore, unable to agree with the contention of Mr. Pal that the decision in Sophia Finance Ltd.'s case (1994)205 ITR 98 (Delhi)[FB] is no longer good law." The finding in this decision was that it is open to the AO to enquire into the identity of the shareholders and their creditworthiness and availability of funds for subscribing the fund. The Revenue Authority can find out as to whether the shareholder existed. The said appeal was remanded for fresh decision by the ld.Tribunal but with the remark that the Tribunal in turn will remit the matter to the AO for making an enquiry in respect of the income tax files of the subscribers who have not responded earlier and to see whether the amount was disclosed ....
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....rials for the Assessing Officer and he cannot go into the realm of suspicion. The Assessing Officer noticed that the assessee had received share application money of Rs. 3 lakhs each from six private limited companies during the year relevant to the assessment year 2004-05. Notice under section 148 was issued in respect of the assessment year 2003-04 and reassessment done. The Assessing Officer made addition of Rs. 18 lakhs to the income of the assessee on protective basis in the assessment year 2004- 05. On appeal : _Held,_ dismissing the appeal, that the assessee had filed copies of PAN, acknowledgment of filing income-tax returns of the companies, their bank accounts statements for the relevant period but had not produced the directors of the companies. The addition made by the Assessing Officer could not be sustained as the primary onus was discharged by the assessee. The Assessing Officer had not investigated whether the modus operandi by the entry operator discussed by the Investigation Wing existed in the case or not. Even the bank statements as claimed by the Assessing Officer revealed that the assessee had received cheques from the shareholders. The asse....
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....ry onus is upon the assessee to establish the source of share application money received. In order to discharge this burden, it is required to place on record the identity of the share holders and the details of the transaction. In this regard, provisions of section 68 are to be followed. Once those documents are produced, then it can be said that the requisite primary onus as casted upon an assessee has been discharged. Thereafter, it is for the AO to scrutinize those details. The Courts have suggested that if the AO had made certain enquiries and nurtures any doubt about the creditworthiness of those investors, then he is free to take appropriate action in their respective hands. However, it is necessary that to probe further there must be basic information in possession of the AO. Those basic information can be said to be the correct addresses of the investors, so that further action can be taken against them. Meaning thereby such investors should have responded the notices issued to them and atleast have furnished their respective confirmation letters. If at least that information is with the Revenue Department, then the Revenue Department is in a position to follow the verdict....
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....n the confirmation letters of these parties are placed. The AO has issued enquiry letters u/s.133(6) which was served on them. Their confirmation letters were received. Since their genuineness and identity were disclosed by the assessee, therefore out of the total addition made u/s.68 of the Act, we hereby hold that a sum of Rs. 11,52,000/- should not be taxed in the hands of the assessee following two decisions of the Hon'ble Supreme Court as cited supra, namely, Lovely Exports Pvt.Ltd. (216 CTR 195)[SC] and Steller Investment Ltd. (251 ITR 263)[SC]. It is to be noted that part of this amount has already been considered in the original assessment order and accordingly relief was granted. 8.1. There were Second category of investors on whom the notices of enquiry were served. In compliance to notice u/s.133(6) of the Act, they have responded that the matter being very old, therefore they did not remember the transaction. However, they have affirmed about the transaction. In this category of investors which are 10 in number at the time of original assessment as well as at the time of set aside assessment their confirmations were furnished. The investment of those investors amount....
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....th their correct postal addresses, we are of the view that it is very difficult for the Revenue Department to proceed against them in any manner in future. It is not fair to direct the Revenue Department to proceed in the dark, therefore we hereby hold that the total amount of these 132 persons of Rs. 9,82,000/- was altogether not substantiated, hence subject to tax u/s.68 of the I.T. Act. 8.4. There is an another Fifth category of persons against whom the enquiry letters u/s.133(6) of the Act were issued but even could not be served. The admitted factual position is that the Postal Department has returned the notices un-served due to non-availability of the persons. In this category, in all, there were 47 investors and the total amount invested by them was at Rs. 5,06,000/-. Since the identity and even their existence could not be verified, therefore in the light of the observations made by the Hon'ble Court, we are of the view that the Revenue Department is helpless to take any legal recourse against them. With the result, we hereby hold that the impugned amount of Rs. 5,06,000/- has to be assessed u/s.68 of the Act in the hands of the assessee-company. 8.5. As per Sixth....
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.... the aforesaid addition. An amount of Rs. 15,88,490/- was computed @ 30% on the said total income and thereupon deduction U/s 80IA was granted. (ii) The matter reached up to the Tribunal and the only issue raked up was in respect of the addition made under section 68 of the I.T.Act, 1961. The Tribunal vide an order dated 25/07/2003(supra) has restored the said issue back to the file of the AO. The directions were only in respect of the amount collected by the assessee-company on private placement out of promoter's quota, consequently invited share application money. No other issue was referred back to A.O. for reconsideration or reinvestigation. (iii) Accordingly a second assessment order was passed u/s.143(3) r.w.s.255(4) of I.T. Act dated 31/03/2005 and in the second round of assessment identically on the total income the AO had granted deduction u/s.80I @ 30% of the total income inclusive of the income assessed u/s.68 of the I.T. Act. (iv) This latest order of the AO dated 31/03/2005 was the subject matter of review by invoking the provisions of section 263 of the I.T.Act by the ld.Commissioner vide an order passed on 30.3.2007. 12.1. Now the question is that ....
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....s to be quashed. We hold accordingly and grounds raised are allowed. 13. In the result, Assessee's appeal (ITA No.1673/Ahd/2007) is allowed. (C) ITA No.404/Ahd/2008 for A.Y. 1992-93 14. Assessee's appeal arising from the order of CIT(A)-VII Baroda dated 15/10/2007. A penalty u/s.271(1)(c) of the Act of Rs. 34,24,700/- was imposed vide order u/s.271(1)(c) dated 28/02/2007 by the AO which was confirmed by the ld.CIT(A) therefore the subject matter of appeal before us. 15. The company has received contribution through private placement in the promoters quota of Rs. 98,99,300/- from 373 applicants. The AO had called upon the assessee to produce persons to whom preferential shares were allotted. 16. The AO while imposing the penalty has noticed that multi-faceted enquiries were made during the course of assessment to enquire about the private placements made by several share applicants. The assessee could furnish the confirmation in respect of the investments upto Rs. 39,43,300/- out of the total allotment of shares of Rs. 98,99,300/-. The assessee was unable to discharge its obligation in respect of the balance share allotment to the extent of Rs. 59,56,000/-. ....