Barkha Synthetics Ltd. vs Assistant Commissioner of Income Tax

This appeal is preferred by the assessee against the order of the Tribunal, Jodhpur Bench, Jodhpur, dt. 28th Nov., 2001 relating to asst. yr. 1997-98. [reported as Shree Barkha Synthetics Ltd. v. Asstt. CIT (2002) 75 TTJ (Jd) 1 Against the very same judgment of the Tribunal, the Revenue had also preferred an IT Appeal No. 09/2003 which has been decided on 1st May, 2003 [reported as CIT v. Shree Barkha Synthetics Ltd. by holding that no substantial question of law arose in the case by adverting to the contentions raised before the Tribunal and the facts of the case.

In the present case, the AO reached its conclusion that in the previous year relating to assessment year, there has been increase in the share capital of the assessee-company on account of issue of shares. The shares have been issued to the limited companies as well as individuals on the basis of receipt of share applications through banking channels.

The Tribunal has noticed the break-up of share application money, which has been added by the AO in the taxable income of the assessee as unexplained cash credits, by invoking Section 68 of the IT Act, 1961.

The aforesaid amount has been added by the AO primarily for the reason because he was of the opinion that the applicant''s creditworthiness has not been proved.

In appeal, the additions made on the aforesaid account were affirmed by CIT(A).

However, the Tribunal found that out of the seven companies from which the share application money has been received, six are genuinely existing and no enquiry has been conducted in respect of their source of share application money received at the time of making of the investment in the company. The assessee has discharged his initial burden and the Revenue has failed to discharge its burden as it did not hold any enquiry into the genuineness of those transactions. However, the Tribunal found that the genuineness of the transactions with the Westbury Invest Trade (P) Ltd. viz., receipt of Rs. 2 lakhs by way of share application money was not established by the assessee because no confirmation from Westbury Invest Trade (P) Ltd. was produced by the assessee and, therefore, the additions of said Rs. 2 lakhs received from share application money from the company were sustained.

Amongst individuals, the share application money alleged to have been received from one Umesh Kumar amounting to Rs. 1 lakh was found to be not genuine, inter alia, on the ground that on enquiry, said Umesh Kumar has denied to have made any such investment in the shares of the company. On this basis, the addition of Rs. 1 lakh was made in the income of the assessee from undisclosed sources u/s 68 of the IT Act which was sustained.

The Revenue had filed IT Appeal No. 09/2003 to the extent it was aggrieved with deleting the additions made by the AO on account of increase in share capital relating to six companies and individuals other than Umesh Kumar. Said appeal has since been dismissed.

The aforesaid two additions are subject-matter of this appeal by the assessee.

The following substantial questions of law were framed at the time of the admission by the Court :

"Q. No. 1. Whether the Tribunal has failed to appreciate the burden of proof lies on the Department to show that the money invested by the shareholders in question belongs to the appellant-company and whether such onus stood discharged by the Department ?

Q. No. 2. Whether the Tribunal has fallen into error in observing that confirmation of investment in share capital by M/s Westbury Investment Trade (P) Ltd. was not filed whereas it was actually furnished, as is evident from the assessment order itself ?"

The principle which the Tribunal has applied in reaching its conclusion in deleting the additions made by the ITO relating to increase in share capital by receipt of money from share applications, was stated in the decision of Delhi High Court in CIT v. Steller Investment Ltd. affirmed on appeal by Supreme Court in CIT v. Steller Investment Ltd.

In the CIT v. Steller Investment Ltd. (supra) the principle which was enunciated by Delhi High Court and affirmed by the Supreme Court, reads as under:

"It is evident that even it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons. If the assessment of the persons who are alleged to have really advanced the money is sought to be reopened, that would have made some sense but we fail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself".

The reason for the aforesaid conclusion was obvious that there is no personal contract between the company and the share applicants. The transactions are made through banking channels and, therefore, once the existence of persons by name in the share applications has been made and in whose name the shares have been issued, the company cannot be held responsible to prove whether the person in whose name share application has been applied is very same person or is somebody else. The position may be somewhat different in a case of cash credit found in books of account as loan from any person, where the company and the creditor have personal interaction.

The Full Bench of Delhi High Court in another case in Commissioner of Income Tax Vs. Sophia Finance Ltd., on which Revenue relies on, had also opined that :

"The mere fact that the assessee-company chooses to show the receipt of the money as capital does not preclude the ITO from going into the question whether this is actually so. Where, therefore, an assessee-company represents that it had issued share on the receipt of share application money, then the amount so received would be credited in the books of account of the company. The ITO would be entitled, and it would indeed be his duty to enquire whether the alleged shareholders do, in fact, exist or not. If the shareholders exist then, possibly, no further enquiry need be made. But if the ITO 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".

The Division Bench of this Court in appeal filed on behalf of Revenue in CIT v. Shree Barkha Synthetics Ltd. referred to above arising out of the same judgment had followed the aforesaid principle by pointing out distinction between investment made by persons whose existence have been shown and in a case where existence has not been established. This Court held that since the Tribunal finding the existence of certain persons having been established has deleted such amount to be added in the income of the assessee for the assessment year in question.

It is in the light of the aforesaid judgment, the principle relating to burden of proof concerning the assessee is that where the matter concerns the money receipts by way of share application from investors through banking channel, he has to prove existence of person in whose name share application is received. Once the existence of investor is proved, it is no further burden of assessee to prove whether that person itself has invested said money or some other person had made investment in the name of that person. The burden then shifts on Revenue to establish that such investment has come from assessee-company itself.

Applying the same principle, the real question, therefore, arising in this case is whether the Tribunal reached the finding on the basis of non-existence of Westbury Investors (P) Ltd. and Umesh Kumar or has sustained additions on other grounds.

On careful perusal of the order of the Tribunal and other material on record, we find that so far existence of both the investors is concerned, the same has not been found against the assessee. In fact, both the additions on account of share application monies received by the assessee were made by the ITO not on the ground of non-existence of the said investors but on other grounds.

So far as Westbury''s case is concerned, the ITO rejected the confirmation submitted by Westbury Invest Trade (P) Ltd. on the ground that "otherwise also it is an outside company not having business dealing with the assessee-company which should invest like this. In the absence of complete particulars regarding the availability of funds with the investor and the fact that the identity of investor-company is not established as original letter sent on 7th Feb., 2000, received back unserved, this investment in share application money is not being considered as genuine and as such being treated as representing assessee''s own money in the shape of share application money."

So far as the later part of the finding of the AO about effect of return of notices is concerned, the Tribunal has not acted upon it. The Tribunal has clearly found in its order that the AO issued notices to the parties on 7th July, 2001, but the notices so issued to the creditors by the Department returned unserved. The notices sent to them including Westbury Investors (P) Ltd. could not be served on them for the reason of change in address and it is not clear whether the assessing authority has again sent notices at changed addresses submitted by authorised representatives of the assessee.

On this aspect of the matter, the Tribunal recorded its finding as under :

"In the instant case analysing the fact situation in its entirety we find that as regards the seven corporate investors, the return of notices unserved is not very material for the reason that the addressees of five of them had changed and the assessee did furnish their changed addresses along with their confirmations but the AO thereafter took no further steps/efforts to pursue/effect the service of notice on them and make enquiry."

The real ground which has prevailed before the Tribunal for sustaining the additions made in respect of investment made by Westbury Invest Trade (P) Ltd. is that the assessee has not furnished confirmation from the Westbury Invest Trade (P) Ltd. whereas the ground on which additions made in respect of other companies were deleted because the confirmation letters were submitted by the assessee.

Apparently the ground for sustaining the additions made in respect of share application money received from Westbury Invest Trade (P) Ltd. is contrary to record.

The AO has himself referred to the confirmation letter received from the said company viz., Westbury Invest Trade (P) Ltd. This finding is contrary to the narration of the facts recorded by the Tribunal itself in the earlier stage of its order. Once the receipt of the confirmation letter is received (accepted) and the identity of the existence of the company has not been disputed, the increase in share capital on account of share application of Westbury Invest Trade (P) Ltd. could not have been sustained on the Tribunal''s own reasoning for deleting other like investments from other companies.

Coming to the other addition sustained on account of investment made by Umesh Kumar, the existence of the investor has been accepted even by the ITO since he has responded to the letter issued by the ITO. However, the investor has denied to have made any such investment.

This case is governed by Sterller''s case (supra) on which the Tribunal has relied. Existence of Umesh Kumar has been established as shareholding (is) issued in his name. No effort was made to find out the real investor as to who has made investment in the name of Umesh Kumar. Hence, additions of increase in share capital on account of share application of Umesh Kumar also could not have been sustained.

In view thereof, this appeal is allowed. The additions made on account of increase in the share capital of the company on account of investment, by Westbury Invest Trade (P) Ltd. amounting to Rs. 2 lakhs and by Mr. Umesh Kumar amounting to Rs. 1 lakh are deleted. To that extent, the Tribunal''s order is set aside in this appeal.

No order as to costs.