Case Law Details
Arman Advisory Pvt. Ltd. Vs PCIT (ITAT Kolkata)
ITAT noted that the Ld. CIT(A) has made a bald statement that the AO’s assessment order attracts Explanation 2(c) u/s. 263 of the Act. However, he failed to spell out in his impugned order how the action of AO while framing the assessment order is not in accordance to any order, direction or instruction issued by the Board under section 119 of the Act. So, the deeming fiction as envisaged in Explanation (2) u/s. 263 of the Act cannot be used to interfere with the order of AO. This action of Ld. Pr. CIT is bad for non-application of mind. In the light of the aforesaid discussion and case laws cited supra, we find merit in the appeal filed by the assessee, therefore, we allow the appeal of assessee on the ground that since the Ld. Pr CIT has exercised his revisional jurisdiction u/s. 263 without satisfying the condition precedent as stipulated in section 263 of the Act. Therefore, we hold that the impugned action of the Ld. Pr. CIT is without jurisdiction and, therefore, is null in the eyes of law and consequently it is quashed.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This is an appeal preferred by the assessee against the order of the Ld. Principal Commissioner of Income Tax (Ld. PCIT), Kolkata-4 dated 12.03.20 19 for the assessment year 2012-13 passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. The main grievance of the assessee is against the action of the Ld. Pr. CIT invoking his second (2nd) revisional jurisdictional u/s. 263 of the Act against the action of the AO(hereinafter referred to as ‘AO’) who framed the re-assessment order pursuant to the first revisional order dated 31.03.2016 which impugned action of Ld. Pr. CIT, according to assessee, is without satisfying the requisite conditional precedent as stipulated u/s. 263 of the Act and therefore without jurisdiction and resultantly bad in law, so it has to be quashed. [Please note that since there are two assessment orders, and two Ld. Pr. CIT’s involved in this Appeal, for better & easy understanding the case, the AO, who framed the original assessment order is called as ‘First AO’ and the re-assessment /second assessment framed AO will be called as the ‘Second AO’ and the first revisional order passed by Pr. CIT is called as ‘First Ld. Pr. CIT’ and the second incumbent, who passed the impugned order is called as ‘Second Ld. Pr. C.I.T’].
3. Brief facts of the case are that the assessee had filed its return of income for the assessment year 2012-13 declaring at NIL income. Subsequently the case was selected for scrutiny. The AO after issuing the statutory notices under section 143(2) and 142(1) of the Act noted that the assessee has received share capital of Rs.40 lakhs and premium of Rs.19,98,00,000/- totalling to Rs.20,38,00,000/-. The AO noted that the assessee-company is a newly incorporated company and, therefore, he asked the assessee to produce all the documents to prove the identity, creditworthiness and genuineness of the share capital introduced into the company. However, according to the Assessing Officer, though the assessee-company filed its submissions and documents as mentioned/requisitioned by him, however despite his direction, the assessee company/share subscribing companies failed to produce their directors before him. Therefore, according to the First Assessing Officer, since the assessee’s share subscribing companies failed to produce their respective directors who invested in shares with premium, he drew adverse inference against the assessee and made an addition of Rs.20,38,00,000/- under section 68 of the Act (hereinafter referred to as the first assessment order). This action of First AO, was interdicted by the First Ld. PCIT by exercising his revisional jurisdiction u/s 263 of the Act to set aside the first assessment order passed under section 143(3) dated 21.03.2015. However in his order (first revisional order) the Ld. PCIT (first) recorded finding of fact after perusal of the first assessment order/folder that pursuant to the notices/requisition made by the first Assessing Officer, the assessee had furnished the audited books of account and other details requisitioned by him (AO) and that the details are available on records. The 1st Principal CIT noted that the First AO had in fact issued notices under section 133(6) of the Act to all the share applicants and pursuant to it, replies were duly received in his office which were found in the record. The Ld. Principal CIT also noted that the AO failed to find anything adverse/wrong/infirm in the replies/documents filed by the assessee/share applicants pursuant to the notices issued under section 133(6) of the Act. In such scenario, therefore, the First Ld. Pr. CIT was of the opinion that there is per-se violation of natural justice in the course of assessment proceedings; and also that the first AO failed to comply with the Board Circular and Office Memorandum dated 07.11.2014 issued by the CBDT and, therefore, he was pleased to cancel the 1st assessment order dated 21.03.2015 and directed the AO to carry on proper examination of the books of account and Bank accounts of the assessee and that of the investors. He also directed the AO to examine the source of share application, identity of investor and its genuineness. The Ld. Pr. CIT also directed the AO not to wait till the time barring period and to initiate the proceedings at the earliest. With the aforesaid observation, he set aside the 1st assessment order dated 21.03.2015 by an order dated 31.03.2016 (hereinafter referred to as the ‘1st Ld. Pr. CIT’s order/revisionary order). The 1st Ld. Pr. CIT’s specific direction is given below”-
“Considering the facts and circumstances of case as discussed above and as per submission of assessee, the assessment order was passed without making inquiries or verifications which should have been made and therefore the order passed on 21.03.2015 stands erroneous insofar as prejudicial to the interest of revenue and is set aside denovo with a direction to AO to carry out proper examination of books of accounts and Bank accounts of assessee as well as investors. AO is also directed to examine the source of share application, identity of investor and its genuineness.
The assessment proceedings may be initiated at the earliest and to be completed without waiting time barring date. The AO must provide sufficient opportunity of being heard to the assessee in order to meet natural justice, equity and fairness.”
4. Pursuant to the 1st revisionary order passed by the Ld. Pr. CIT dated 31.03.2016, in the second-round of reassessment, the 2nd AO (hereinafter referred to as the “2nd A.O.”) framed the re-assessment order dated 15.09.2016 by making an addition of Rs.2,919/- under section 14A read with Rule 8D under section 143(3) /263 of the Act (hereinafter referred to as the “2nd assessment/reassessment order).
5. In respect of the said 2nd assessment order/reassessment order dated 15.09.20 16, the Pr. CIT -4 (hereinafter referred to as the “2nd Ld. PCIT), wherein he issued show-cause notice dated 31.12.2018 and conveyed his desire to exercise his revisional jurisdiction again u/s 263 of the Act. The 2nd Ld. Pr. CIT thereafter heard the assessee and passed the impugned order dated 12.03.2019, wherein he was pleased to again set aside the reassessment order/2nd assessment order dated 15.09.2016 and directed denovo adjudication (hereinafter referred to as the “2nd /impugned revisionary order of Second Ld. PCIT) by observing as under:-
“7.2. In my considered opinion, this is a case of lack of enquiry on the part of the AO. The decision on this issue could be taken only after examining and verifying the facts/submission of the A.R. on this score. Not collecting the full facts and not taking enquiry to logical end which could enable AO to take decision based on the totality of facts makes this order erroneous insofar as prejudicial to the interest of revenue. After having considered the position of law and facts and circumstances of the instant case, I am of the considered opinion that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of revenue in accordance with the Explanation 2(c ) below Section 263(1) of the Act. Accordingly, the assessment is set aside to the table of AO on the issue as outlined in para-2 above. The AO is directed to provide reasonable opportunity to the assessee company to produce documents & evidences which it may choose to rely upon for substantiating its own claim. The AO is further directed to adjudicate the said issue de novo and pass a fresh assessment order in accordance with the relevant provisions of law.”
6. Aggrieved by the aforesaid action of the Ld. 2nd Pr. CIT, the assessee has come in appeal before us challenging the action of the Ld. 2nd Pr. CIT by preferring the legal issue that since the 2nd AO has passed the 2nd assessment order dated 15.09.20 16 pursuant to the order of the 1st Ld. Pr. CIT dated 31.03.2016, the 2nd Ld. Pr. CIT ought to not have interfered by exercising his revisionary jurisdiction without validly holding that 2nd Assessing Officer’s order as erroneous as well as prejudicial to the revenue.
7. Assailing the action of the Ld. Pr. CIT (2nd) to have invoked his revisionary jurisdiction, the Authorized Representative of the assessee Advocate Shri Soumitra Choudhury submitted that the 2nd AO had conducted enquiries as directed by the 1st Ld. Pr. CIT by order dated 31.03.2016. The Ld. A.R. pointed out that the specific directions by the 1st Ld. Pr. CIT to the 2nd AO was the following (i) proper examination of the books of account; (ii) proper examination of Bank accounts of the assessee as well as that of the investors; (iii) to examine the source of share application money, the identity of the investors and genuineness of the transactions. According to the Ld. A.R., all the aforesaid directions of the Ld. Pr. CIT (1st) were complied in letter and spirit by the 2nd AO. The Ld. R. also reminded us that the 1st Ld. Pr. CIT in his first revisionary order dated 31.03.2016 has already made a finding of fact that the 1st AO had, in fact, issued notices under section 133(6) of the Act to all the 13 (thirteen) share applicants and pursuant to which all of them had replied directly to the AO along with the documents requisitioned by him to prove the identity, creditworthiness and genuineness of the transactions. According to the Ld. A.R., even in the 2nd round, the 2nd AO had issued summons to all the 13 (thirteen) share applicant companies and directed them to produce their respective Directors and pursuant to which all the Directors of the 13 (thirteen) companies appeared before the 2nd Assessing Officer, which fact is evident from perusal of at pages 35 to 94 of the paper book. The Ld. A.R. drew our attention to the contents of these pages to show that the Directors of the share applicant companies had in fact appeared on various dates before the AO and the 2nd AO has recorded on oath their answers to the questions asked by and thereafter going through the audited books of account of all the share applicants and Bank statements; and after verifying the genuineness of the documents submitted was pleased not to draw any adverse inference against the share capital and premium collected by the assessee. Moreover according to the Ld. A.R., as directed by the 1st Ld. Pr. CIT, even the “source of source” was verified by the 2nd AO before being satisfied with the credit entries. Therefore, according to the Ld. A.R., when the 2nd AO as per the direction of the 1st Pr. CIT has carried out the enquiry by summoning all the Directors of the share subscribing companies u/s 131 of the Act; and after recording their statements on oath and after verification of the documents submitted by them as well as by the assessee was pleased to accept the share capital/premium is a plausible action, which action of the 2nd AO, has been erroneously interdicted by the 2nd Ld. PCIT by passing the impugned order dated 12.03.2019. And therefore, according to him, the 2nd Ld. Pr. CIT ought not to have interfered with the second/2nd assessment order dated 15.09.2016 by exercising his revisionary jurisdiction under section 263 of the Act. Therefore, he pleads that the void impugned order of the 2nd Ld. Pr. CIT dated 12.03.2019 be quashed.
8. Per contra the Ld. CIT DR Md. Ghayas Uddin vehemently opposes the plea of the Ld. A.R. and contended that the 2nd Pr. CIT had jurisdiction to interfere with the order of the AO even if it happens to be second assessment order or 3rd assessment order. According to the Ld. CITDR, there is no restriction under section 263 of the Act prohibiting the Ld. Pr. CIT not to exercise jurisdiction in such kind of cases. According to the Ld. Pr. CIT, the 2nd AO has not carried out proper enquiry as found by the 2nd Ld. Pr. CIT in his impugned order dated 12.03.2019; and since there is lack of enquiry on the part of the 2nd AO, the Ld. Pr. CIT has all the jurisdiction to enquire with the second assessment order passed by him. According to Ld. CITDR, since there is lack of enquiry on the part of 2nd AO, the order of 2nd AO is erroneous as well as prejudicial to the revenue and therefore, he rightly exercised his revisionary jurisdiction under section 263 of the Act and therefore, does not want us to interfere with the impugned order.
9. We have heard both the parties and gone through the submissions on behalf of the assessee and the revenue along with the documents furnished and the case laws relied upon by both the parties. In this case, the assessee had filed return of income declaring total income at ‘NIL’ and later the case of the assessee was selected for scrutiny under CASS and the reason for selection for scrutiny was “to examine large share premium received”. Thereafter the First AO issued statutory notices to the assessee and framed the assessment order under section 143(3) of the Act dated 21.03.2015 by making an addition of 20,38,00,000/-. Thereafter the 1st Ld. Pr. CIT-4, Kolkata invoked his revisional jurisdiction under section 263 of the Act and took note out of the fact that even though the assessee as well as the 13 (thirteen) share subscribers have replied to the First Assessing Officer’s notices/requisitions u/s 133(6) of the Act and filed all the documents called for by him to prove their identity, creditworthiness and genuinety of the share transaction, the First AO drew adverse view against them because the Directors of the assessee/share applicants did not turn up before him pursuant to the summons issued under section 131 of the Act. The Ld. First PCIT found that despite all the documents being produced by the assessee/share applicants as per the requisitions of the First AO, still he made high-pitched assessment which was erroneous. The Ld. PCIT after going through the assessment records was of the opinion that there was violation of natural justice and also violation of Office Memorandum dated 07.11.2014 of CBDT and was pleased to set aside of the 1st Assessing Officer’s order and directed the AO to carry out proper examination of books of account and Bank accounts of the assessee as well the investors and to examine the source of share application, identity of the investors and its genuineness by order dated 31.03.2016 (First PCIT order).
10. Pursuant to the direction of the 1st Ld. Principal CIT dated 31.03.2016, the 2nd AO framed the denovo re-assessment order dated 15.09.20 16, wherein the 2nd AO being satisfied was pleased to accept the assessee’s share transaction in respect of share capital and share premium to the tune of Rs.20,3 8,00,000/- and made further addition of Rs.2,9 19/- under section 14A of the Act. Thereafter the 2nd Ld. Pr. CIT after issuing show-cause notice to the assessee has set aside the said re-assessment/2nd assessment order of the AO dated 15.09.2016 by passing the impugned order dated 12.03.2019 and directed the AO to pass de-novo assessment order, which means in this case the AO had to frame the 3rd assessment order.
11. Aggrieved by the aforesaid action of the Second Ld. PCIT, Kol-4, now the assessee is before us. The question before us is twofold. Firstly, whether the second Ld. Pr. CIT satisfied the statutory condition-precedent as prescribed in section 263 of the Act before invoking the Revisionary Jurisdiction. Secondly, whether the Second Ld Pr. CIT can again interfere in the re-assessment order framed by the AO which was pursuant to the first revisional order passed by the First Ld. Pr. CIT u/s. 263 of the Act, when the subject matter was the same and the re-assessment order of the second AO has merged with the First Revisional order of First Ld. Pr. CIT. In order to adjudicate both this legal issue, first of all we need to examine the basic jurisdictional issue i.e. whether the condition precedent stipulated by section 263 of the Act was satisfied, so that the Second Ld. Pr. CIT could have exercised his revisional power which he is empowered to do by the Act. For that, we note that the statutory condition precedent as prescribed by section 263 of the Act is that the Ld. Pr. CIT can invoke the revisional jurisdiction, if the assessment order is erroneous in so far as prejudicial to the Revenue. Keeping this in mind, we have to examine as to whether in the first place the order of the Second Assessing Officer found fault by the Second Principal CIT is erroneous as well as prejudicial to the interest of the Revenue. For that, let us take the guidance of judicial precedent laid down by the Hon’bIe Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC), wherein their Lordship have held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the Commissioner of Income Tax ( in short, ‘CIT’). The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated an issue before him; then the assessment order passed by the Assessing Officer can be termed as an erroneous order. Coming next to the second limb, which is required to be examined is as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue? The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Pr. CIT/CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law.”
12. Taking note of the aforesaid dictum of law of the Hon’ble Apex Court which was laid in Malabar Industries Ltd. vs. CIT (supra). Let us examine whether assessment/reassessment order passed by Second AO u/s 143(3)/263 of the Act dated 15.09.20 16 is erroneous insofar as prejudicial to the interest of the revenue. As we have seen, the First AO in the original first assessment order passed u/s 143(3) of the Act made an addition of Rs. 20,38,00,000/- by an order dated 21.03.2015, which has been interdicted by the First revisional order passed by the First Ld. PCIT vide order dated 31.03.2016, wherein the Ld. PCIT was pleased to set aside the original first assessment order dated 21.03.2015 and directed the AO to denovo assess the income of the assessee and give specific direction to enquire about share capital and premium. The operative portion of first revisional order dated 31.03.2016 is again reproduced below for the sake of continuity:
“4.v) Considering the facts and circumstances of case as discussed above and as per submission of assessee, the assessment order was passed without making inquiries or verifications which should have been made and therefore the order passed on 21.03.2015 stands erroneous insofar as prejudicial to the interest of revenue and is set aside denovo with a direction to AO to carry out proper examination of books of accounts and Bank accounts of assessee as well as investors. AO is also directed to examine the source of share application, identity of investor and its genuineness.
The assessment proceedings may be initiated at the earliest and to be completed without waiting time barring date. The AO must provide sufficient opportunity of being heard to the assessee in order to meet natural justice, equity and fairness.” (emphasis given by us)
13. Pursuant to the aforesaid direction of the Ld. First PCIT the Second AO has framed the reassessment/2nd assessment order by making an addition of Rs. 2,919/- u/s 14A vide order dated 15.09.20 16.
14. Thereafter the 2nd Ld. PCIT again exercised his revisional jurisdiction and was pleased to set aside by order dated 12.03.2019 the reassessment/2nd reassessment order of the AO dated 15.09.2016 and directed fresh assessment (which means a 3rd assessment to be framed).
15. The aforesaid action of the 2nd Ld. PCIT dated 12.03.2019 is challenged before us. According to the Ld. Counsel Shri Soumitra Chowdhury, the Ld. PCIT erred in assuming his jurisdiction without satisfying the jurisdiction of condition precedence as prescribed u/s 263 of the Act and therefore the action of the Ld. PCIT is wholly without jurisdiction and therefore, ab-initio void and therefore need to be struck down. We note that in order to interfere with the second assessment/reassessment order passed by the 2nd AO u/s 143(3)/263 of the Act dated 15.09.2016, the 2nd Ld. PCIT has alleged lack of enquiry on the part of the AO in respect of share application money and for not collecting the full facts. Therefore it is noted that according to Ld. PCIT, the AO’s (2nd AO) decision was not based on the totality of facts, which makes the 2nd Assessment/reassessment order erroneous insofar as prejudicial to the interest of the revenue. The 2nd Ld. PCIT also opines that the AO’s order dated 15-09-2016 of the AO (second assessment/re-assessment order) is in accordance with the Explanation 2(c) below section 263(1) of the Act therefore according to him by a deeming fiction of law the order is erroneous. Therefore, he was pleased to set aside the said re-assessment order and directed the AO to pass a fresh/ De-novo assessment order, which will be the third assessment order in this case. According to the Ld. Counsel, the Second Ld. Pr. CIT in the second round while exercising his revisional jurisdiction could not have first of all assumed revisional jurisdiction and secondly could not have modified the earlier revisional order of the First Ld. Pr. CIT order passed u/s 263 of the Act dated 31-03-2016, when the fact remains that the AO has followed the direction of the Ld. First Pr. CIT on the subject matter i.e. share application money (share capital & premium ) while assuming the second re-assessment order dated 15-09-20 16. In order to appreciate this contention of Ld AR, we perused the first revisional order dated 31-03-2016 passed u/s. 263 of the Act by the first incumbent Ld. Pr. CIT while setting aside the original first assessment order dated 2 1-03-2015 wherein he has recorded certain finding of fact after perusal of the records (first assessment folder/records of assessee). The First Pr CIT has taken note that in the first round of assessment proceedings, the assessee company had duly furnished before the AO the following documents:-
(i) audited financial statements;
(ii) copy of Form filed with the ROC;
(iii) copy of PAN Card of the assessee company;
(iv) details and copy of share applicants;
(v) bank statement reflecting the transaction;
(vi) records relating to investors in order to establish their identity, genuineness and creditworthiness of the share subscribers.
16. The First Ld. Pr. CIT found that AO in the first assessment proceedings though has been provided with the aforesaid documents has not examined these documents, which according to him, should have been carried out by the AO. Further, The First Ld. Pr. CIT found fault with the AO’s order for not giving any credence to the fact that pursuant to issuance of notice u/s. 133(6) of the Act by him the share subscriber had filed all documents requisition and the AO did not record the same in the order-sheet. The Ld. Pr. CIT found fault with the AO’ s order in not discussing the basis of evidence on which adverse inference was drawn against the assessee. Moreover, the First Ld. Pr. CIT found fault with the AO for not bothering to examine the contention of the assessee or to bring on record anything against the assessee and according to him, the AO has simply jumped to the conclusion and treated the share capital as unexplained cash credit. The First Ld. Pr. CIT found fault with the action of AO for not bothering to issue show cause notice regarding points of addition to be made. Therefore, according to the First Ld. Pr. CIT the first original assessment order framed u/s. 143(3) dated 2 1-03-2015 was against the principle of natural justice and, therefore, he found it fit to order de novo assessment and gave specific direction in respect of share capital & premium collected by assessee.
17. Thereafter, the ld. Pr. CIT was pleased to direct “ assessment order passed on 21.03.2015 is set aside de novo with the direction to the AO to carry out proper examination of books of account and bank statement of the assessee as well as the investor. The AO is also directed to examine the source of share application, entity of investor and its genuineness”. (emphasis given by us). He also directed that the assessment proceedings to be initiated at the earliest and to be completed without waiting for time bar limit. With the aforesaid specific direction, the First Ld. Pr. CIT has set aside the first original assessment order dated 2 1-03-2015.
18. So we note that the second AO was specifically directed by the First Ld. Pr. CIT to carry out the followings actions in addition to de-novo assessment Thereafter, we note that the original assessment of AO dated 2 1.03.2016 was set aside back to AO u/s. 263 of the Act by the First Ld. Pr. CIT by his first revisional order dated 31.03.2016 for de-novo assessmentwhich means the second AO is free to assess the income of assessee afresh, but with specific directions to AO while framing the reassessment order vide para 4(v) of his order. The specific directions of First Ld Pr CIT to AO are as under:
i) To carry out proper examination of the books of accounts and bank account of the assessee;
ii) To carry out proper examination of the books of accounts and bank account of the investors;
iii) AO to examine the source of the share applicants;
iv) The AO to examine the identity of the investor and its genuineness;
v) The AO to complete the assessment at the earliest without waiting for the time barring date.
19. Now let us examine whether the second AO carried out his role of an investigator. In this respect, we note that pursuant to the aforesaid direction of the First Ld. Pr. CIT (first revisional order) dated 31-03-2016, the Second AO has summoned the directors of the thirteen (13) share applicants u/s 131 of the Act and has recorded their statement on oath from 8/7.06.206 which is evident from perusal of page 34 to 94 of PB wherein it is noted that the second AO has asked approx nineteen (19) questions to each of the directors of all the thirteen (13) share applicants. And he has recorded in his re-assessment/second assessment order that Shri Vinay Kumar Singh, A.R of the assessee company appeared and produced the books of account and bank statement of the assessee company which he has examined. The second AO acknowledged to have examined the book of the investor/share applicant companies book also. We note that the following documents have been produced by the directors of the share subscribing companies before the Second AO to prove the identity, creditworthiness and genuineness of the transaction:-
i) The respective director’s PAN and Address Proof
ii) Ledger of assessee company in their share applicant
iii) Statement in regard to application made with payment and source details
iv) Bank statement for the same
v) Letter of the Allotment received from assessee company
vi) Statement and documents evidencing Source
vii) ITR Acknowledgement and ITR-6 for the AY 2012-13
viii) Audited Balance Sheet for the financial year 2011-12
ix) Form 20-B filed before ROC
x) Form-18 as address proof of respective share applicant companies.
20. The AO also acknowledges in his re-assessment second assessment order that he has examined the books of account & bank statement of assessee as well as that investor (share subscribing thirteen (13) companies). And from a perusal of the page 35-94 of PB (order-sheet) it reveals that all the directors of the thirteen share subscribers have appeared before the Second AO and their statement in question & answer form has been recorded an oath and that they have produced the aforesaid details to prove their respective identity, creditworthiness & genuineness of the transaction. And after having conducted enquires as per the direction of the Ld. Pr.CIT-4, Kolkata (First Ld. Pr. CIT) in his order passed u/s. 263 of the Act dated 31-03-2016 (First Revisional Order). Thereafter, the second AO by order dated 15.09.2016 disallowed an amount of Rs. 2,919/- u/s. 14A of the Act and thus it is noted that second AO did not draw any adverse inference against the share capital and premium collected by the assessee after carrying out the aforesaid exercise as directed by the First Ld. Pr. CIT to him. This exercise carried out by the second AO while framing the second assessment/re-assessment has been faulted as a case of lack of enquiry by the second Ld. Pr.CIT and the precise question is whether the action of second AO in respect of share capital and premium collected by the assessee can be termed as a case of lack of enquiry.
21. According to us, when an Assessment Order has been framed on an issue which is the result of lack of enquiry, then the assessment order in respect of that issue would be erroneous because of that omission on the part of the AO to investigate that relevant fact which if enquired could have created a different result and consequently affected the veracity of the very claim made by the assessee. Then in that case we can say that the AO failed to discharge his role as an investigator, which omission caused prejudice to the Revenue, then the condition precedent to invoke revisional jurisdiction us/. 263 of the Act will be satisfied. So the question is whether this fault i.e. lack of enquiry on share capital and premium alleged by the second Ld. Pr.CIT is correct, which is a mixed question of fact and law.
22. So the question is whether there is any merit on the finding of the Second Ld. Pr. CIT that the second assessment order/re-assessment order dated 15.09.2016 can be termed as erroneous for lack of enquiry. On a conjoint reading of the second SCN and operative portion of the impugned order, it can be safely deduced that according to Second Ld. Pr. CIT, the AO in the second round has not enquired about the share capital & premium collected by the assessee. For that we need to carefully examine as to whether the second AO has carried out his dual role as an investigator as well as an adjudicator while deciding the issue of share capital and premium collected by the assessee for AY 2012-13. Before we examine about the investigative role of the AO, we need to examine the law as it stood in AY 20 12-13 and is applicable in this case. Section 68 of the Act reads as under:-
Section 68: 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: Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee company shall be deemed to be not satisfactory, unless-
(a) The person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
(b) Such explanation in the opinion of the Assessing officer aforesaid has been found to be satisfactory:
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10].
23. Here it is to be noted that the first proviso and second proviso was inserted by Finance Act, 2012 with effect from 01.04.2013, so it is applicable only for/from AY 2013- 14 and not for this AY 2012-13.
24. Next let us refer to the definition of income stated in Section 2(24) of the Act.
Section 2(24) of the Act includes:-
i) profits and gains
xvi) any consideration received for issue of shares as exceeds the Fair Market Value of the shares referred to in clause (viib) of sub-section (2) of section 56.
25. It is noted that this amendment was made by an insertion of clause (xvi) in section 2(24) of the Act was by Finance Act 2012 with effect from 01.04.2013.
26. Correspondingly, the Parliament inserted sub-clause (viib) in sub-section 2 of section 56 of the Act by Finance Act 2012, w.e.f. 01.04.2013, that is for AY 2013-14 (not this AY 2012-13) in respect of computing and taxing the premium of shares in the hands of assessee (i.e.to tax the difference in consideration of value of shares if it exceeded the fair market value), which for the purpose of complete understanding of the law though not applicable is reproduced as under:-
Section 56(2) (viib):
“Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received-
(i) By a venture capital undertaking from a venture capital company or a venture capital fund, or
(ii) By a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Explanation- For the purposes of this clause,
(a) The fair market value of the shares shall be the value-
(i) As may be determined in accordance with such method as may be prescribed, or
(ii) As may be substantiated by the company to the satisfaction of the Assessing Officer based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. Whichever is higher:
(b) Venture capital company, venture capital fund, and venture capital undertaking shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10]”.
27. So we note that in this assessment year before us i.e. AY 2012-13, the law in force was that if any sum is found credited in the books of an assessee in a financial year and, if the AO asks for the explanation of assessee in respect of the nature and source thereof, then the assessee is duty bound to explain the nature and source of the credit entry in the books and if the assessee fails to explain or if the AO is not satisfied, he may charge to income tax the sum so credited. So, the assessee is bound to explain before the AO the nature and source of share capital, i.e. the identity, creditworthiness and genuineness of the share capital. In this AY 2012-13, the assessee is bound to know about the share applicants who wish to invest their identity, whether they have the financial capacity (creditworthiness) and they are genuine investors in their company (assessee). In this AY, the assessee is not bound by law at the time of collection of share capital to ask the share-applicants from where it is getting the money to invest in the assessee’s company. And we also note that share premium can be taxed if it exceeds the fair market value only from next AY i.e. AY 2013-14 and not in this A.Y 2012-13. For coming to such a conclusion let us discuss few case laws:
(A) Coming to the share premium, it is noted that this Tribunal in ITA241 1/KOL/2017 in the case of Kanchan Plywood Products Pvt. Ltd. –vs.- ITO vide order dated 01.05.2019 has taken note that – Per contra, the Learned DR vehemently supported the order of the authorities below and wondered us to how the assessee-company issued share to three Private Limited Companies when its face value of Rs. 10/- at a premium of Rs. 990/-. According to the Learned DR, the assessee-company had a meager return of income in the year under consideration and therefore, question of any person subscribing such high premium to the shares of the assessee-company cannot be believed. A:cording to the Learned DR when the income of the assessee is meager, the action of the share subscribing companies in giving astronomical prices for the shares is against preponderance of probabilities and cited the decision of the Hon’ble Supreme Court as well as Delhi High Court in CIT vs N .R. Portfolio Pvt. Ltd.
Further, according to Ld. AR in the case of unlisted companies, it is common knowledge that premium fixed is a matter of mutual agreement and ITAT Mumbai in the case of Gagandeep Infrastructure Pvt. Ltd., (supra) has held that it is a prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. And the aforesaid view of the ITAT has been upheld by the Hon’ble Bombay High Court order dated 20th March 2017. Further the Hon’ble High Court observed as under-
“(i) We find that the proviso to Section 68 of the Act has been introduced by the Finance Act 2012 with effect from 1 stApril, 2013. Thus it would be effective only from the Assessment Year 2013-14 onwards and not for the subject Assessment Year. In fact, before the Tribunal, it was not even the case of the Revenue that Section 68 of the Act as in force during the subject years has to be read/understood as though the proviso added subsequently effective only from 1stApril, 2013 was its normal meaning. The Parliament did not introduce to Section 68 of the Act with retrospective effect nor does the proviso so introduced that it was introduced “for removal of doubts” or that it is “declaratory”. Therefore it is not open to give it retrospective effect, by proceeding on the basis that the addition of the proviso to Section 68 of the Act is immaterial and does not change the interpretation of section 68 of the Act both before and after the adding of the proviso. In any view of the matter the three essential tests while confirming the pre proviso Section 68 of the Act laid down by the Courts namely the genuineness of the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it has found satisfied.
(ii) Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders i.e. they are bogus. The Apex Court in CIT vis. Lovely Exports (P) Ltd. 317 ITR 218 in the context to the pre-amended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. It does not entitle the Revenue to add the same to the assessee’s income as unexplained cash credit. “
(B) The Tribunal Mumbai Bench in the case of DCIT vs. M/s. Alcon Biosciences (P) Ltd., ITA No. 1946/M/2016, Order dated 28.02.2018 held as under·
“As regards the AOs observation with regard to the issue of shares at a face value of Rs. 10/- issued at a premium of Rs.990 per share, we find that there is no merit in the findings of the AO for the reason that the issue of shares at a premium and subscription to such shares is within the knowledge of the company and the subscribers to the share application money and the AO does not have any role to play as long as the assessee has proved genuineness of transactions. We further notice that the AO cannot question issue of shares at a premium and also cannot bring to tax such share premium within the provisions of section 68 of the Act, before (supra) held that Proviso inserted to section 68 is prospective in nature. Hon ‘ble M.P. High Court in the case of CIT vs. Chain House International (P) Ltd., order dated 07.08.2018, decision reported in 98 taxmann. com47 has held at para 52 as under- “Issuing the share at a premium was a commercial decision. It is the prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of shareholder whether they want to subscribe the shares at such a premium or not. This was a mutual decision between both the companies. In day to day market, unless and until, the rates if fixed by any Govt. Authority or unless there is any restriction on the amount of share premium under any law, the price of the shares is decided on the mutual understanding of the parties concerned .. ”.
(C) The Mumbai Tribunal in the case of ACIT-l(l) vs. M/s. Gagandeep Infrastructure Pvt. Ltd. the ITAT has held as under:
“We have carefully perused the orders of the lower authorities. In our considered view, the issue of shares at premium is always a commercial decision which does not require any justification. Further the premium is a capital receipt which has to be dealt with in accordance with Sec. 78 of the Companies Act, 1956. Further, the company is not required to prove the genuineness, purpose or justification for charging premium of shares, share premium by its very nature in a capital receipt and is not income for its ordinary sense. It is not in dispute that the assessee had filed all the requisite details/documents which are required to explain in the books of accounts by the provisions of Sec. 68 of the Act. The assessee has successfully established the identity of the companies who have purchased shares at a premium. The assessee has also filed bank details to explain the source of the share holders and the genuineness of the transaction was also established by filing copies of share application forms and Form No. 2 filed with the Registrar of Companies.
Considering all these undisputed facts, it can be safely concluded that the initial burden of proof as rested upon the assessee has been successfully discharged by the assessee. Even if it is held that excess premium has been charged, it does not become income as it is a capital receipt. The receipt is not in the revenue field. What is to be probed by the AO is whether the identity of the assessee is proved or not. In the case of share capital, if the identity is proved, no addition can be made u/s 68 of the Act. We draw support from the decision of the Hon’ble Supreme Court in the case of Lovely Exports Ltd. 317 ITR 218. “
(D)[Green Infra Limtied – 38 taxmann.com 253 (Mumbai-Trib).
10. We have considered the rival submissions and carefully perused the orders of the lower authorities and the material evidences brought on record in the form of Paper book. The entire dispute revolves around the charging of share premium of Rs. 490/- per share on a book value of Rs. 10/- each. This dispute is more so because of the fact that the assessee company was incorporated during the year under consideration. Therefore, according to the revenue authorities, it is beyond any logical reasoning that a company with zero balance sheet could garner Rs. 490/-per share premium from its subscribers. Such transaction may raise eyebrows but considering the subscribers to the assessee company, the test for the genuineness of the transaction goes into oblivion. It is an undisputed fact admitted by the Revenue authorities that 10,19,000 equity shares has been subscribed and allotted to IDFC PE Fund-II which company is a Front Manager of IDFC Ltd., in which company Government of India is holding 18% of shares. The contributors to the IDFC PE Fund-Il who is a subscriber to the assessee’s share capital, are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank which are all public sector undertakings. Therefore, to raise eyebrows to a transaction where there is so much of involvement of the Government directly or indirectly does not make any sense.
10.1 No doubt a non-est company or a zero balance company asking for a share premium of Rs. 490/- per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the share holders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. Details of subscribers were before the Revenue authorities. The AO has also confirmed the transaction from the subscribers by issuing notice u/s. 133(6) of the Act. The Board of Directors contains persons who are associated with IDFC group of companies, therefore their integrity and credibility cannot be doubted. The entire grievance of the Revenue revolves around the charging of such of huge premium so much so that the Revenue authorities did not even blink their eyes in invoking provisions of Sec. 56( I) of the Act.
[Hon’ble Bombay High Court in the case of Apeak Infotech-88 taxmann.comita. 695 (Bombay) when the question was “whether the amount received as share premium on issue of share by the respondent-assessee-companies could be taxed as profits and gains of business in the hands of the assessee under section 28(iv) of the Act”.
In any case, we may point out that the amendment to section 68 of the Act by the addition of proviso thereto took place with effect from April 1, 2013. Therefore, it is not applicable for the subject assessment year 20 12-13. So for as the pre-amended section 68 of the Act is concerned, the same cannot be invoked in this case, as evidence was led by the respondents-assessee before the Assessing Officer with regard to identity, capacity of the investor as well as the genuineness of the investment. Therefore, admittedly, the Assessing Officer did not invoke section 68 of the Act to bring the share premium to tax. Similarly, the Commissioner of Income-tax (Appeals) on consideration of facts, found that section 68 of the Act cannot be invoked. In view of the above, it is likely that the Revenue may have taken an informed decision not to urge the issue of section 68 of the Act before the Tribunal.
It is further pertinent to note that the definition of income as provided under section 2(24) of the Act at the relevant time did not define as income any consideration received for issueof share in excess of its fair market value, This Came into the statute only with effect from April 1, 2013 and thus, would have no application to the share premium received by the respondent-assessee in the previous year relevant to the assessment year 20 12-13. Similarly, the amendment to section 68 of the Act by addition of proviso was made subsequent to previous year relevant to the subject assessment year 2012-13 and cannot be invoked. It may be pointed out that this court in CIT-v. -Gagandeep Infrastructure (P.) Ltd. [201TI 80 taxmann.com.272/247 Taxman 245/394 ITR 680 (Bom) has while refusing to entertain a question with regard -to the .proviso to section 68 of the Act has held that the proviso to section 68 of the Act introduced with effect from April 1, 2013 will not have retrospective effect and would be effective only from the assessment year 2013-14.
(E) ITA-2270/KOL/2016 –Trend Infra Developers Pvt. Ltd.
The assessee specifically argued before the ld. CIT(A) that the allotment of shares at a premium cannot be considered as sham or income of the assessee. It was pleaded at a preliminary level that the receipt of share capital and share premium is on capital account and that the same cannot be subject to tax as income. Specific submissions were also made in the context of introduction of section 56(2)(viib) inserted by the Finance Act, 2012 with effect from 01.04.20l3 which reads as under:
“(viib) Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received-
(iii) By a venture capital undertaking from a venture capital company or a venture capital fund, or
(iv) By a company from a class or classes of persons as may be notified by the
Central Government in this behalf.
Explanation- For the purposes of this clause,
(c) The fair market value of the shares shall be the value-
(iii) As may be determined in accordance with such method as may be prescribed, or
(iv) As may be substantiated by the company to the satisfaction of the Assessing Officer based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or anyother business or commercial rights of similar nature, whichever is higher:
(d)Venture capital company, venture capital fund, and venture capital undertaking shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10]”.
It was pleaded that the aforesaid provisions cannot be made applicable for the year under appeal. Accordingly, it was argued that the issuance of shares of premium cannot be brought to tax under any section of the Income Tax Act up to assessment year 2012- 13.
We find that the reliance placed by the Id. AR in the decision of Hon’ble Bombay High Court in Pr. CIT vs. Apeak Infotech reported in 88 Taxmann.com 695 dt 08.06.2017 wherein the question raised before the Hon’ble Bombay High Court are as under:
A. Whether on the facts and circumstances of the case and in law, the Tribunal was correct to uphold the decision on Commissioner of Income Tax (Appeals) that the share premium received by the assessee-company cannot be taxed under Section 68 of the Act ignoring the ratio laid down by this Court in its decision reported in the case of Major Metals Ltd. vs. Union of India [2013J 3591TR 450 (Bom)?
B. Whether on the facts and circumstances of the case and in law, the Tribunal as well as the Commissioner of Income Tax (Appeals) was right in deleting addition made by the Assessing Officer, by holding that the share premium receipt is capital in nature?”
The Hon’ble Court held as under:
Regarding Question A:
(a) The issue raised by the Revenue in this question is to bring to tax the share premium received under section 68 of the Act. We find that the issue of bringing the share premium to tax under section 68 of the Act was not an issue which was urged by the appellant Revenue before the Tribunal. The only issue which was urged before the Tribunal as recorded in paraJ J of the impugned order is the addition of share capital and share application money in the hands of the assessee as income under section 28(iv) of the Act. We find that the Commissioner of Income-tax (Appeals) did consider the issue of applicability of section 68 of the Act and concluded that it does not apply.
The Revenue seems to have accepted the same and did not urge this issue before the Tribunal. Mr. Bhoot, learned counsel appearing for the Revenue also fairly states that the issue of applicability of section 68 of the Act was not urged by the Revenue before the Tribunal.
(b) It is a settled position in law as held by this court in CIT v. Tata Chemicals Ltd. [20021 J 22 Taxman 6431256 ITR 395 (Bom.) that in an appeal under section 260A of the Act, the High Court can only decide a question if it had been raised before the Tribunal even if not determined by the Tribunal. Therefore, no occasion to consider the question as prayed for arises.
(c) In any case, we may point out that the amendment to section 68 of the Act by the addition of proviso thereto took place with effect from April 1, 2013. Therefore, it is not applicable for the subject assessment year 2012-13. So for as the pre-amended section 68 of the Act is concerned, the same cannot be invoked in this case, as evidence was led by the respondents-assessees before the Assessing Officer with regard to identity, capacity of the investor as well as the genuineness of the investment. Therefore, admittedly, the Assessing Officer did not invoke section 68 of the Act to bring the share premium to tax. Similarly, the Commissioner of Income-tax (Appeals) on consideration of facts, found that section 68 of the Act cannot be invoked. In view of the above, it is likely that the Revenue may have taken an informed decision not to urge the issue of section 68 of the Act before the Tribunal.
(d) We may also point out that decision of this court in Major Metals Ltd. v. Union of India [20121 19 com 1761207 Taxman 185/[20131 359 ITR 450 Bom. proceeded on its own facts to uphold the invocation of section 68 of the Act by the Settlement Commission. In the above case, the Settlement Commission arrived at a finding of fact that the subscribers to shares of the assessee-company were not creditworthy inasmuch as they did not have financial standing which would enable them to make an investment of Rs. 6,00,00,000 at premium at Rs. 990 per share. It was this finding of the fact arrived at by the Settlement Commission which was not disturbed by this court in its writ jurisdiction. In the present case the person who have subscribed to the share and paid share premium have admittedly made statement on oath before the Assessing Officer as recorded by the Tribunal. No finding in this case has been given by the authorities that shareholder/share applicants were unidentifiable or bogus.
(e) In the above view Question No. A is not being entertained in view of the decision in Tata Chemical Ltd. (supra). Accordingly, the question (A) is not entertained.
Regarding Question B :
(a) We find that the impugned order of the Tribunal upheld the view of the Commissioner of Income-tax (Appeals) to hold that share premium is capital receipt and therefore, cannot be taxed as income. This conclusion was reached by the impugned order following the decision of this court in Vodafone India Services (P.) Ltd. (supra) and of the apex court in G. S. Homes and Hotel (P.)Ltd. (supra). In both the above cases the court has held that the amount received on issue of share capital including premium are on capital account and cannot be considered to be income.
(c) It is further pertinent to note that the definition of income as provided under section 2(24) of the Act at the relevant time did not define as income any consideration received for issue of share in excess of its fair market value. This came into the statute only with effect from April 1, 2013 and thus, would have. no application to the share premium received by the respondent-assessee in the previous year relevant to the assessment year 2012-13. Similarly, the amendment to section 68 of the Act by addition of proviso was made subsequent to previous year relevant to the subject assessment year 2012-13 and cannot be invoked. It may be pointed out that this court in CIT v. Gagandeep Infrastructure (P.) Ltd. [2017] 80 taxmann.com 272/247 Taxman 245/394 ITR 680 (Bom.) has while refusing to entertain a question with regard to section 68 of the Act has held that the proviso to section 68 of the Act introduced with effect from April 1, 2013 will not have retrospective effect and would be effective only from the assessment year 2013-14.
(c) In view of the above. question No. B as proposed also does not give rise to any substantial question of law as it is an issue concluded by the decision of this court in Vodafone India Services (P.) Ltd. (supra) and in the apex court in G. S. Homes and Hotels (P.)Ltd. (supra).Thus not entertained.
28. Relying on the aforesaid judicial precedents of Hon’ble High courts and the Tribunal, we are of the opinion that in this AY i.e. AY 2012-13, the amendment in section 68 of the Act took place wherein the addition of proviso was with effect from 01.04.2013 and so is not applicable in this AY. Further, as noted, the definition of income as provided under section 2(24) of the Act at the relevant time (AY 2012-13) did not define as income any consideration received for issue of shares in excess of its fair market value. This came into effect from 01.04.2013 and thus would have no application to the share premium received by the assessee in the previous year relevant to AY 2012-13. With this back-drop in respect of the requirement of law, let us study the judicial precedents which were laid by the Hon’ble Apex Court and Hon’ble High Courts on the provision of section 68 of the Act, while dealing with Share Capital/loan etc so that we can examine whether pursuant to the specific direction of First Ld Pr CIT, the second AO has discharged his role as an investigator and whether his re-assessment/second assessment order is a plausible view or can be termed as unsustainable view. Before we adjudicate let us look at section 68 of the Act as is applicable in this case and the judicial precedents on the issue at hand.
29. Section 68 under which the addition has been made by the Assessing Officer reads as under:
“68. 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. “
The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this case the legislative mandate is not in terms of the words ‘shall’ be charged to income-tax as the income of the assessee of that previous year”. The Hon’ble Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word “may” and not “shall“. Thus the un-satisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as held by the Hon’ble Supreme Court in the case of CIT v. Smt. P. K. Noorjahan [1999] 237 ITR 570.
30. In a case wherein the AO made the addition u/s 68 of the Act because the lenders of loan to assessee did not turn up before him [AO], the Hon’ble Apex Court in the case of Orissa Corpn. (P) Ltd. (supra) 159 ITR 78 has held that onus of the assessee (in whose books of account credit appears) stands fully discharged if the identity of the creditor is established and actual receipt of money from such creditor is proved. In case, the Assessing Officer is dissatisfied about the source of cash deposited in the bank accounts of the creditors, the proper course would be to assess such credit in the hands of the creditor (after making due enquiries from such creditor). In arriving at this conclusion, the Hon’ble Court has further stressed the presence of word “may” in section 68. The Hon’ble Apex Court ratio was taken note by the Hon’ble Gujarat High Court in the case of Dy CIT vs Rohini Builders (2002) 256ITR360 wherein the Hon’ble High Court observed at pages 369 and 370 of this order are reproduced hereunder:-
“Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, cannot be a ground to treat the loans taken by the assessee from those creditors as non-genuine in view of the principles laid down by the Supreme Court in the case of Orissa Corporation [1986] 159 ITR 78. In the said decision the Supreme Court has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the Revenue’s case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non-compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw and adverse inference against the assessee. in the case of six creditors who appeared before the Assessing Officer and whose statements were recorded by the Assessing Officer, they have admitted having advanced loans to the assessee by account payee cheques and in case the Assessing Officer was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those creditors by’ treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69.
31. In the case of Nemi Chand Kothari 136 Taxman 213, (supra), the Hon’ble Guahati High Court has thrown light on another aspect touching the issue of onus on assessee under section 68 of the Act, by holding that the same should be decided by taking into consideration also the provision of section 106 of the Evidence Act which says that a person can be required to prove only such facts which are in his knowledge. The Hon’ble Court in the said case held that, once it is found that an assessee has actually taken money from depositor/lender who has been fully identified, the assessee/borrower cannot be called upon to explain, much less prove the affairs of such third party, which he is not even supposed to know or about which he cannot be held to be accredited with any knowledge. In this view, the Hon’ble Court has laid down that section 68 of Income-tax Act, should be read along with section 106 of Evidence Act. The relevant observations at page 260 to 262, 264 and 265 of the order are reproduced herein below:-
“While interpreting the meaning and scope of section 68, one has to bear in mind that normally, interpretation of a statute shall be general, in nature, subject only to such exceptions as may be logically permitted by the statute itself or by some other law connected therewith or relevant thereto. Keeping in view these fundamentals of interpretation of statutes, when we read carefully the provisions of section 68, we notice nothing in section 68 to show that the scope of the inquiry under section 68 by the Revenue Department shall remain confined to the transactions, which have taken place between the assessee and the creditor nor does the wording of section 68 indicate that section 68 does not authorize the Revenue Department to make inquiry into the source(s) of the credit and/or sub-creditor. The language employed by section 68 cannot be read to impose such limitations on the powers of the Assessing Officer. The logical conclusion, therefore, has to be, and we hold that an inquiry under section 68 need not necessarily be kept confined by the Assessing Officer within the transactions, which took place between the assessee and his creditor, but that the same may be extended to the transactions, which have taken place between the creditor and his sub-creditor. Thus, while the Assessing Officer is under section 68, free to look into the source(s) of the creditor and/or of the sub-creditor, the burden on the assessee under section 68 is definitely limited. This limit has been imposed by section 106 of the Evidence Act which reads as follows:
“Burden of proving fact especially within knowledge.-When any fact is especially within the knowledge of any person, the burden) of proving that fact is upon him. “
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What, thus, transpires from the above discussion is that white section 106 of the Evidence Act limits the onus of the assessee to the extent of his proving the source from which he has received the cash credit, section 68 gives ample freedom to the Assessing Officer to make inquiry not only into the source(s)of the creditor but also of his (creditor’s) sub-creditors and prove, as a result, of such inquiry, that the money received by the assessee, in the form of loan from the creditor, though routed through the sub-creditors, actually belongs to, or was of, the assessee himself. In other words, while section 68 gives the liberty to the Assessing Officer to enquire into the source/source from where the creditor has received the money, section 106 makes the assessee liable to disclose only the source(s) from where he has himself received the credit and IT is not the burden of the assessee to prove the creditworthiness of the source(s) of the sub-creditors. If section 106 and section 68 are to stand together, which they must, then, the interpretation of section 68 are to stand together, which they must, then the interpretation of section 68 has to be in such a way that it does not make section 106 redundant. Hence, the harmonious construction of section 106 of the Evidence Act and section 68 of the Income- tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been. eventually, received by the assessee. It, therefore, further logically follows that the creditor’s creditworthiness has to be Judged vis-a-vis the transactions, which have taken place between the assessee and the creditor, and it is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transactions, which took between the creditor and sub-creditor and/or creditworthiness of the sub- creditors, for, these aspects may not be within the special knowledge of the assessee. “
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” … If a creditor has, by any undisclosed source, a particular amount of money in the bank, there is no limitation under the law on the part of the assessee to obtain such amount of money or part thereof from the creditor, by way of cheque in the form of loan and in such a case, if the creditor fails to satisfy as to how he had actually received the said amount and happened to keep the same in the bank, the said amount cannot be treated as income of the assessee from undisclosed source. In other words, the genuineness as well as the creditworthiness of a creditor have to be adjudged vis-a-vis the transactions, which he has with the assessee. The reason why we have formed the opinion that it is not the business of the assessee to find out the actual source or sources from where the creditor has accumulated the amount, which he advances, as loan, to the assessee is that so far as an assessee is concerned, he has to prove the genuineness of the transaction and the creditworthiness of the creditor vis-a-vis the transactions which had taken place between the assessee and the creditor and not between the creditor and the sub-creditors, for, it is not even required under the law for the assessee to try to find out as to what sources from where the creditor had received the amount, his special knowledge under section 106 of the Evidence Act may very well remain confined only to the transactions, which he had’ with the creditor and he may not know what transaction(s) had taken place between his creditor and the sub-creditor… “
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“In other words, though under section 68 an Assessing Officer is free to show, with the help of the inquiry conducted by him into the transactions, which have taken place between the creditor and the sub-creditor, that the transaction between the two were not genuine and that the sub-creditor had no creditworthiness, it will not necessarily mean that the loan advanced by the sub-creditor to the creditor was income of the assessee from undisclosed source unless there is evidence, direct or circumstantial, to show that the amount which has been advanced by the sub-creditor to the creditor, had actually been received by the sub-creditor from the assessee ….”
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“Keeping in view the above position of law, when we turn to the factual matrix of the present case, we find that so far as the appellant is concerned, he has established the identity of the creditors, namely, Nemichand Nahata and Sons (HUF) and Pawan Kumar Agarwalla. The appellant had also shown, in accordance with the burden, which rested on him under section 106 of the Evidence Act, that the said amounts had been received by him by way of cheques from the creditors aforementioned. In fact the fact that the assessee had received the said amounts by way of cheques was not in dispute. Once the assessee had established that he had received the said amounts from the creditors aforementioned by way of cheques, the assessee must be taken to have proved that the creditor had the creditworthiness to advance the loans. Thereafter the burden had shifted to the Assessing Officer to prove the contrary. On mere failure on the part of the creditors to show that their sub-creditors had creditworthiness to advance the said loan amounts to the assessee, such failure, as a corollary, could not have been and ought not to have been, under the law, treated as the income from the undisclosed sources of the assessee himself, when there was neither direct nor circumstantial evidence on record that the said loan amounts actually belonged to, or were owned by, the assessee. Viewed from this angle, we have no hesitation in holding that in the case at hand, the Assessing Officer had failed to show that the amounts, which had come to the hands of the creditors from the hands of the sub-creditors, had actually been received by the sub-creditors from the assessee. In the absence of any such evidence on record, the Assessing Officer could not have treated the said amounts as income derived by the appellant from undisclosed sources. The learned Tribunal seriously fell into error in treating the said amounts as income derived by the appellant from. undisclosed sources merely on the failure of the sub-creditors to prove their creditworthiness.”
32. Further, in the case of CIT v. S. Kamaljeet Singh [2005] 147 Taxman 18(All.) their lordships, on the issue of discharge of assessee’s onus in relation to a cash credit appearing in his books of account, has observed and held as under:-
“4. The Tribunal has recorded a finding that the assessee has discharged the onus which was on him to explain the nature and source of cash credit in question. The assessee discharged the onus by placing (i) confirmation letters of the cash creditors; (ii) their affidavits; (iii) their full addresses and GIR numbers and permanent account numbers. It has found that the assessee’s burden stood discharged and so, no addition to his total income on account of cash credit was called for. In view of this finding, we find that the Tribunal was right in reversing the order of the AA C, setting aside the assessment order.”
33. We also take note of the decision of the Hon’ble High Court, Calcutta in the case of S.K. Bothra & Sons, HUF v. Income-tax Officer, Ward- 46(3), Kolkata 347 ITR 347 wherein the Court held as follows:
“15. It is now a settled law that while considering the question whether the alleged loan taken by the assessee was a genuine transaction, the initial onus is always upon the assessee and if no explanation is given or the explanation given by the appellant is not satisfactory, the Assessing Officer can disbelieve the alleged transaction of loan. But the law is equally settled that if the initial burden is discharged by the assessee by producing sufficient materials in support of the loan transaction, the onus shifts upon the Assessing Officer and after verification, he can call for further explanation from the assessee and in the process, the onus may again shift from the Assessing Officer to assessee.
16. In the case before us, the appellant by producing the loan-confirmation-certificates signed by the creditors, disclosing their permanent account numbers and address and further indicating that the loan was taken by account payee cheques, no doubt, prima facie, discharged the initial burden and those materials disclosed by the assessee prompted the Assessing Officer to enquire through the Inspector to verify the statements.”
34. In a case where the issue was whether the assessee availed cash credit as against future sale of product, the AO issued summons to the creditors who did not turn up before him, so AO disbelieved the existence of creditors and saddled the addition, which was overturned by Ld. CIT(A). However, the Tribunal reversed the decision of the Ld. CIT(A) and upheld the AO’s decision, which action of Tribunal was challenged in the Hon’ble High Court, Calcutta in the case of Crystal Networks (P.) Ltd. v. Commissioner of Income-tax 353 ITR 171 wherein the Tribunal’s decision was overturned and decision of Ld. CIT(A) upheld and the Hon’ble High Court held that when the basic evidences are on record the mere failure of the creditor to appear cannot be basis to make addition. The court held as follows:
8. Assailing the said judgment of the learned Tribunal learned counsel for the appellant submits that Income-tax Officer did not consider the material evidence showing the creditworthiness and also other documents, viz., confirmatory statements of the persons, of having advanced cash amount as against the supply of bidis. These evidence were duly considered by the Commissioner of Income-tax (Appeals). Therefore, the failure of the person to turn up pursuant to the summons issued to any witness is immaterial when the material documents made available, should have been accepted and indeed in subsequent year the same explanation was accepted by the Income-tax Officer. He further contended that when the Tribunal has relied on the entire judgment of the Commissioner of Income-tax (Appeals), therefore, it was not proper to take up some portion of the judgment of the Commissioner of Income-tax (Appeals) and to ignore the other portion of the same. The judicial propriety and fairness demands that the entire judgment both favourable and unfavourable should have been considered. By not doing so the Tribunal committed grave error in law in upsetting the judgment in the order of the Commissioner of Income-tax (Appeals).
9. In this connection he has drawn our attention to a decision of the Supreme Court in the case of Udhavdas Kewalram v. CIT [19671 66 ITR 462. In this judgment it is noticed that the Supreme Court as proposition of law held that the Tribunal must In deciding an appeal, consider with due care, all the material facts and record its finding on all the contentions raised by the assessee and the Commissioner in the light of the evidence and the relevant law.
10. We find considerable force of the submissions of the learned counsel for the appellant that the Tribunal has merely noticed that since the summons issued before assessment returned unserved and no one came forward to prove. Therefore, it shall be assumed that the assessee failed to prove the existence of the creditors or for that matter the creditworthiness. As rightly pointed out by the learned counsel that the Commissioner of Income-tax (Appeals) has taken the trouble of examining of all other materials and documents, viz., confirmatory statements, invoices, challans and vouchers showing supply of bidis as against the advance. Therefore, the attendance of the witnesses pursuant to the summons issued, in our view, is not important. The important is to prove as to whether the said cash credit was received as against the future sale of the product of the assessee or not. When it was found by the Commissioner of Income-tax (Appeals) on facts having examined the documents that the advance given by the creditors have been established the Tribunal should not have ignored this -fact finding. Indeed the Tribunal did not really touch the aforesaid fact finding of the Commissioner of Income-tax (Appeals) as rightly pointed out by the learned counsel. The Supreme Court has already stated as to what should be the duty of the learned Tribunal to decide in this situation. In the said judgment noted by us at page 464, the Supreme Court has observed as follows:
“The Income-tax Appellate Tribunal performs a judicial function under the Indian Income-tax Act; it is invested with authority to determine finally all questions of fact. The Tribunal must, in deciding an appeal, consider with due care all the material facts and record its finding on all the contentions raised by the assessee and the Commissioner, in the light of the evidence and the relevant law. “
11. The Tribunal must, in deciding an appeal, consider with due care all the material facts and record its finding on all contentions raised by the assessee and the Commissioner, in the light of the evidence and the relevant law. It is also ruled in the said judgment at page 465 that if the Tribunal does not discharge the duty in the manner as above then it shall be assumed the judgment of the Tribunal suffers from manifest infirmity.
12. Taking inspiration from the Supreme Court observations we are constrained to hold in this matter that the Tribunal has not adjudicated upon the case of the assessee in the light of the evidence as found by the Commissioner of Income-tax (Appeals). We also found no single word has been spared to upset the fact finding of the Commissioner of Income-tax (Appeals) that there are materials to show the cash credit was received from various persons and supply as against cash credit also made.
13. Hence, the judgment and order of the Tribunal is not sustainable. Accordingly, the same is set aside. We restore the judgment and order of the Commissioner of Income-tax (Appeals). The appeal is allowed.
35. When a question as to the creditworthiness of a creditor is to be adjudicated and if the creditor is an Income Tax assessee, it is now well settled by the decision of the Hon’ble Jurisdictional Calcutta High Court that the creditworthiness of the creditor cannot be disputed by the AO of the assessee but the AO of the creditor. In this regards our attention was drawn to the decision of the Hon’ble High Court, Calcutta in the COMMISSIONER OF INCOME TAX, KOLKA TA-Ill Versus DATAWARE PRIVATE LIMITED ITAT No. 263 of 2011 Date: 21st September, 2011 wherein the Hon’ble Court held as follows:
“In our opinion, in such circumstances, the Assessing officer of the assessee cannot take the burden of assessing the profit and loss account of the creditor when admittedly the creditor himself is an income tax assessee. After getting the PAN number and getting the information that the creditor is assessed under the Act, the Assessing officer should enquire from the Assessing Officer of the creditor as to the genuineness” of the transaction and whether such transaction has been accepted by the Assessing officer of the creditor but instead of adopting such course, the Assessing officer himself could not enter into the return of the creditor and brand the same as unworthy of credence.
So long it is not established that the return submitted by the creditor has been rejected by its Assessing Officer, the Assessing officer of the assessee is bound to accept the same as genuine
when the identity of the creditor and the genuineness” of transaction through account payee cheque has been established.
We find that both the Commissioner of Income Tax (Appeal) and the Tribunal below followed the well-accepted principle which are required to be followed in considering the effect of Section 68 of the Act and we thus find no reason to interfere with the concurrent findings of fact recorded by both the authorities.”
36. Our attention was also drawn to the decision of the Hon’ble Supreme Court while dismissing SLP in the case of Lovely Exports as has been reported as judgment delivered by the CTR at 216 CTR 295:
“Can the amount of share money be regarded as undisclosed income under section 68 of the Income tax Act, 1961? We find no merit in this special leave petition for the simple reason 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. Hence, we find no infirmity with the impugned judgment.
37. Our attention was also drawn to the decision of the Hon’ble Calcutta High Court while relying on the case of Lovely Exports, in the appeal of COMISSIONER OF INCOME TAX, KOLKATA-IV Vs ROSEBERRY MERCANTILE (P) LTD., ITAT No. 241 of 2010 dated 10- 01-2011 has held:
“On the facts and in the circumstances of the case, Ld. CIT(A) ought to have upheld the assessment order as the transaction entered into by the assessee was a scheme for laundering black money into white money or accounted money and the Ld. CIT (A) ought to have held that the assessee had not established the genuineness of the transaction. “
It appears from the record that in the assessment proceedings it was noticed that the assessee company during the year under consideration had brought Rs. 4, 00, 000/- and Rs.20,00,000/-towards share capital and share premium respectively amounting to Rs.24,00, 000/- from four shareholders being private limited companies. The Assessing Officer on his part called for the details from the assessee and also from the share applicants and analyzed the facts and ultimately observed certain abnormal features, which were mentioned in the assessment order. The Assessing Officer, therefore, concluded that nature and source of such money was questionable and evidence produced was unsatisfactory. Consequently, the Assessing Officer invoked the provisions under Section 68/69 of the Income Tax Act and made addition of Rs.24,00,000/-.
On appeal the Learned CIT (A) by following the decision of the Supreme Court in the case of Cl. T. vs. M/s. Lovely Exports Pvt. Ltd., reported in (2008) 216 CTR 195 allowed the appeal by holding -that share capital/premium of Rs. 24,00,000/- received from the investors was not liable to be treated under Section 68 as unexplained credits and it should not be taxed in the hands of the appellant company.
As indicated earlier, the Tribunal below dismissed the appeal filed by the Revenue.
After hearing the learned counsel for the appellant and after going through the decision of the Supreme Court in the case of Cl. T. vs. M/s. Lovely Exports Pvt. Ltd. [supra], we are at one with the Tribunal below that the point involved in this appeal is covered by the said Supreme Court decision in favour of the assessee and thus, no substantial question of law is involved in this appeal. The appeal is devoid of any substance and is dismissed.
38. Our attention was drawn to the decision of the Hon’ble High Court, Calcutta in the case of Commissioner Of Income Tax vs M/s. Nishan Indo Commerce Ltd dated 2 December, 2013 in INCOME TAX APPEAL NO.52 OF 2001 wherein the Court held as follows:
“The Assessing Officer was of the view that the increase in share capital by Rs.52,03,500/-was nothing but the introduction of the assessee’s own undisclosed funds/income into the books of accounts of the assessee company. The Assessing Officer accordingly treated the investment as unexplained credit under Section 68 of the Income Tax Act and added the same to the income of the assessee.
Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) being the First Appellate Authority and contended that the Assessing Officer had no material to show that the share capital was the income of the assessee company and as such the addition made by the Assessing Officer under Section 68 of the Act was wrong.
The learned Commissioner of Income Tax (Appeals) after hearing the department and the Assessee Company deleted the addition of Rs. 52, 03,500/- to the income of the assessee company during the Assessment Year in question. The learned Commissioner of Income Tax Appeals found that there were as many as 2155 allottees, whose names, addresses and respective shares allocation had been disclosed.
The Commissioner of Income Tax Appeals, further found that the Assessee Company received the applications through bankers to the issue, who had been appointed under the guidelines of the Stock Exchange and the Assessee Company had been allotted shares on the basis of allotment approved by the Stock Exchange. The Assessee Company had duly filed the return of allotment with the Registrar of Companies, giving complete particulars of the allottees.
The Commissioner of Income Tax (Appeals) found that inquires had confirmed the existence of most of the shareholders at the addresses intimated to the Assessing Officer, but the Assessing Officer took the view that their investment in the Assessee Company was not genuine, on the basis of some extraneous reasons. The Commissioner of Income Tax (Appeals) took note of the observation of the Assessing Officer that enquiry conducted by the Income Tax Inspector had revealed that nine persons making applications for 900 shares were not available at the given address and rightly concluded that the total share capital issued by the Assessee Company could not be added as unexplained cash credit under ‘Section 68 of the Income Tax Act. Moreover, if the nature and source of investment by any shareholder, in shares of the Assessee Company remained unexplained, liability could not be foisted on the company. The concerned shareholders would have to explain the source of their fund.
The learned Commissioner on considering the submissions of the, respective parties and considering the materials, found that the Assessing Officer had applied the provisions of Section 68 of the Income Tax Act arbitrarily and illegally and in any case without giving the assessee adequate opportunity of representation and/or hearing.
Learned Tribunal agreed with the factual findings of the learned Commissioner and accordingly the learned Tribunal dismissed the appeal of the Revenue and affirmed the decision of the learned Commissioner.
Mr. Dutta appearing on behalf of the petitioners cited judgment of the Division Bench of this Court in Commissioner of Income Tax Vs. Ruby Traders and Exporters Limited reported in 236 (2003) ITR 3000 where a Division Bench of this Court held that when Section 68 is resorted to, it is incumbent on the assessee company to prove and establish the identity of the subscribers, their credit worthiness and the genuineness of the transaction.
The aforesaid judgment was rendered in the context of the factual background of the aforesaid case where, despite several opportunities being given to the assessee, nothing was disclosed about the identity of the shareholders. In the instant case, the assessee disclosed the identity and address and particulars of share allocation of the shareholders. It was also found on the facts that all the shareholders were in existence. Only nine shareholders subscribing to about 900 shares out of 6, 12,000 shares were not found available at their addresses, and that too, in course of assessment proceedings in the year 1994, i.e., almost 3 years after the allotment.
By an order dated 2nd May, 2001, this Court admitted the appeal on three questions which essentially centre around the question of whether the Appellate Commissioner erred in law in deleting the addition of Rs. 52, 03, 500/- to the income of the assessee as made by the Assessing Officer. We are of the view that there is no question of law involved in this appeal far less any substantial question of law.
The learned Tribunal has concurred with the learned Commissioner on facts and found that there were materials to show that the assessee had disclosed the particulars of the shareholders. The factual findings cannot be interfered with, in appeal. We are of the view that once the identity and other relevant particulars of shareholders are disclosed, it is for those shareholders to explain the source of their funds and not for the assessee company to show wherefrom these shareholders obtained funds.”
39. Further, our attention was drawn to the decision of the Hon’ble High Court, Calcutta in the case of Commissioner of Income Tax vs M/s. Leonard Commercial (P) Ltd on 13 June, 2011 in ITAT NO 114 of 2011 wherein the Court held as follows:
“The only question raised in this appeal is whether the Commissioner of Income-tax (Appeals) and the Tribunal below erred in law in deleting the addition of Rs.8,52,000/-, Rs. 91,50,000/-and Rs. 13,00,000/- made by the Assessing Officer on account of share capital, share application money and investment in HTCCL respectively.
After hearing Md. Nizamuddin, learned Advocate appearing on behalf of the appellant and after going through the materials on record, we find that all such application money were received by the assessee by way of account payee cheques and the assessee also disclosed the complete list of shareholders with their complete addresses and GIR Numbers for the relevant assessment years in which share application was contributed. It further appears that all the payments were made by the applicants by account payee cheques.
It appears from the Assessing Officers order that his grievance was that the assessee was not willing to produce the parties who had allegedly advanced the fund.
In our opinion, both the Commissioner of Income-tax (Appeals) and the Tribunal below were justified in holding that after disclosure of the full particulars indicated above, the initial onus of the assessee was shifted and it was the duty of the Assessing Officer to enquire whether those particulars were correct or not and if the Assessing Officer was of the view that the particulars supplied were insufficient to detect the real share applicants, to ask for further particulars.
The Assessing Officer has not adopted either of the aforesaid courses but has simply blamed the assessee for not producing those share applicants.
In our view, in the case before us so long the Assessing Officer was unable to arrive at a finding that the particulars given by the assessee were false, there was no scope of adding those money under section 68 of the Income- tax Act and the Tribunal below rightly held that the onus was validly discharged.
We, thus, find that both the authorities below, on consideration of the materials on record, rightly applied the correct law which are required to be applied in the facts of the present case and, thus, we do not find any reason to interfere with the concurrent findings of fact based on materials on record.
The appeal is, thus, devoid of any substance and is dismissed summarily as it does not involve any substantial question of law.
40. In the light of the afore-cited judicial precedents, let us examine the case in hand and find out whether pursuant to the specific direction of First Ld. Pr. CIT, the second AO has discharged his role as an investigator in respect of share capital and premium collected by the assessee or whether the AO failed to enquire on this issue and whether his re-assessment/second assessment order is a plausible view or it can be termed as an unsustainable view in law. We on a conjoint reading of the First Revisional Order of the First Pr. CIT dated 31.08.2016 and the reassessment /Second assessment of the AO dated 15.09.2016, the following facts can be discerned:-
(a)The First Ld. Pr. CIT has taken note in the first revisional order dated 31.03.2016 after perusal of the first assessment records/folder that during the first round of scrutiny proceeding, the assessee company produced the following documents before the first AO in the original assessment to satisfy the AO in respect of identity, creditworthiness and genuineness of share subscribers:-
(i) audited financial statements;
(ii) copy of Form filed with the ROC;
(iii) copy of PAN Card of the assessee company;
(iv) details and copy of share applicants;
(v) bank statement reflecting the transaction;
(vi) records relating to investors in order to establish identity, genuineness and creditworthiness of the share subscribers.
41. We note that further the First Ld. Pr. CIT in his order at para 4 found that AO in the first assessment proceedings though has been provided with the aforesaid documents and that all the details are available on records. The Ld. PCIT also recorded a finding of fact that in the first round “The AO issued notices u/s 133(6) of the Act to all the share applicants and reply from all of them were duly received and the same was pleased on record.” However, the Ld. PCIT took note that despite the assessee and the share subscribers having provided all the documents as requisitioned by the AO, still the AO has not bothered to examine these documents and that AO failed to record the facts of receipt of the replies from share subscribers pursuant to his notice u/s 133(6) of the Act and has slept over the file without making any further action. The First Ld. Pr. CIT found fault with the AO’ s order in not discussing the basis of evidence on which adverse inference was drawn against the assessee. Moreover, the First Ld. Pr. CIT found fault with the AO for not bothering to examine the contention of the assessee or to bring on record anything against the assessee and thus according to him, the AO with a pre-determined mind has simply jumped to the conclusion that the share capital collected by assessee as unexplained cash credit u/s. 68 of the Act. Therefore, according to the First Ld. Pr. CIT, the first original assessment order framed u/s. 143(3) of the Act dated 21.03.2015 was against the principle of natural justice and, therefore, he found it fit to order denovo assessment and gave specific direction in respect of share capital & premium collected by assessee.
42. Thereafter, the Ld. Pr. CIT was pleased to direct “…………………………. assessment order passed on 21.03.2015 is set aside de novo with the direction to the AO to carry out proper examination of books of account and bank statement of the assessee as well as the investor. The AO is also directed to examine the source of share application, identity of investor and its genuineness”. (emphasis given by us). He also directed that the assessment proceedings to be initiated at the earliest and to be completed without waiting for time bar limit. With the aforesaid specific direction, the First Ld. Pr. CIT has set aside the first original assessment order dated 21-03-2015.
43. So we note that the second AO was specifically directed by the First Ld. Pr. CIT to carry out the followings actions in addition to de-novo assessment which means the second AO is free to assess the income of assessee afresh, however, he has to do the following specific actions as directed in respect of share-applicants who applied for shares in assessee-company. The specific directions of Ld. Pr CIT to AO are as under:
(i) To carry out proper examination of the books of accounts and bank account of the assessee;
ii) To carry out proper examination of the books of accounts and bank account of the investors;
iii) AO to examine the source of the share applicants;
iv)The AO to examine the identity of the investor and its genuineness;
v) The AO to complete the assessment at the earliest without waiting for the time barring date.
44. In the second round before the AO for de novo re-assessment, the second AO as per the specific direction of the First Ld. Pr. CIT (supra), conducted the reassessment proceeding. As per the specific direction of Ld. First Pr. CIT, it is noted from the order sheet placed at page 35 to 94 of PB that all the directors of the thirteen (13) share subscribing companies appeared before him and their respective statements were recorded by AO on oath and they in the process duly produced the books of account on 07/08.06.2016 and furnished the relevant details viz., (i) copy of ITR, (ii) audited accounts, (iii) details of directors, (iv) the details of the share-applicants, (v) details of business activity, (vi) details of increase in share capital, (vii) Form 2, (viii) Form 5, (ix) bank statements evidencing payment through banking transaction. [And here we should keep in mind that the First Ld. Pr. CIT’s finding of fact after perusal of original assessment records that assessee in the first round before AO has produced PAN,ROC details, audited financial statements, details and copy of share applicants, bank statements reflecting the transaction, records relating to investors to establish identity, creditworthiness & genuineness. And that the first AO has issued notice u/s 133(6) of the Act pursuant to which all the thirteen (13) share subscribers have replied along with all documents requisitioned by him] And the second AO after conducting enquiry and thereafter inspecting and verifying the books of account and the bank statement of the assessee as well as that of the investor/share subscribers, has accepted the share transaction of the assessee with premium from these thirteen (13) share subscribers. So according to us, from the aforesaid exercise carried out by the Second AO, it cannot be said that second AO did not enquire into the “nature and source” of the share capital collected by the assessee company. And moreover it is common knowledge that in this computer/digital era, the AO on a click of the mouse, could have easily verified the identity of the share applicant which is available in the website of Ministry of Corporate Affairs and the ITR Acknowledgments filed by them, will enable the AO to cross verify and collect details from the AO of the respective share applicants and independently from the Revenue’s departmental data base. We note that all the share subscribing parties filed all the documents called for by the AO (PB-Page 111-368) and were also examined by the AO . Thus, we are of the considered opinion that the AO after verification of their PAN/CIN/ITR, has not drawn any adverse opinion or doubted the identity of the share applicants which view of AO is a possible view in the light of the documents referred to and we also by applying the presumption in section 114 of Indian Evidence Act 1872, we presume that the quasi-judicial act of the second AO have been regularly performed. Therefore, we are of the opinion that the identity of the thirteen (13) share subscribers cannot be doubted and so we approve the action of second AO to accept the same.
45. Coming to the creditworthiness of the shareholders, our attention was drawn to the balance sheet of the shareholders which was filed before the AO and the Ld. Pr. CIT and we note that their source o f investment and net worth as per balance sheet as on 31.03.2012 as well as the sum invested by them in the assessee are discernible as under:
46. So, from a perusal of the above chart, we note that the assessee and the shareholders have brought to the notice of Second AO that they (share subscribers) have enough net worth to invest in the assessee company and the share subscribing companies pursuant to the AO’s notice have furnished their respective audited accounts from which the aforesaid facts are clearly discernible ; and moreover the share subscribers have also filed before the second AO the source from which they subscribed to shares of assessee (though not required as per law in force for AY 2012-13), bank statement, audited balance sheet etc. Thus the assessee had discharged the onus on it about the creditworthiness of the shareholders. So we note that the source of the investments has been clearly brought to the notice of the second AO during the assessment/reassessment proceedings. Further, the bank statements of all the shareholders as well as that of assessee were filed before the AO, which revealed that the share capital and premium have been subscribed by them through banking channel (NEFT or cheque) which goes on to show that the assessee has discharged the onus in respect of genuineness of the transaction. Based on the documents and materials called for by the AO who accepted the same after verification is an act of enquiry. And we note that revenue has not brought on record any material to challenge the veracity of the documents referred to above. Moreover, the second Ld. Pr. CIT in his impugned order has not brought any material to rebut the presumption of second AO to justify his intervention u/s. 263 of the Act and which would have upset the decision of the second AO’s factual view on the identity, creditworthiness and genuinety of the share transaction. In such a scenario, the second AO’s view based on the documents referred to by him is a plausible view and in consonance with judicial precedents (supra). Further, it is noted that the share applicants had furnished the source of investment made in the assessee-company after getting the notice under section 133(6) of the Act.
47. So, from the aforesaid facts revealed during the second round, we note that AO has discharged his duty as an Investigator and enquired as per the direction of the First Ld. Pr. CIT dated 31.03.2016 u/s. 263 of the Act (First 263 order) and further we note that the Second Ld. Pr. CIT while issuing the Show Cause Notice while exercising his revisional jurisdiction for second time has not made even a single allegation about the non-compliance/failure on the part of Second AO in respect of the specific direction given by the First Ld. Pr. CIT dated 31.03.2016 while setting aside the original assessment order passed by the AO dated 15.09.2016. In other words, in the impugned order the second Ld. Pr. CIT has not found fault with the action of the second AO in giving effect to the specific directions given by him while passing the first revisional order on 31.03.2016. Thus, we note that when the second AO while framing the reassessment order pursuant to the specific direction of the First Ld. Pr. CIT’s order dated 31.03.2016 (first revisional order) has complied with the specific directions of the First Ld. Pr. CIT and based on the inquiry conducted and after perusal of the documents running more than 330 pages which reveals the identity, creditworthiness and genuineness of the share capital and premium collected by the assessee from the share subscribers, the satisfaction of AO as envisaged in sec. 68 of the Act is a plausible view and the fact that the directors of the share subscribing companies appeared before AO pursuant to summons and produced all documents along with the audited financial statements and other documents referred supra, the assessee had discharged the onus upon it about the identity creditworthiness and genuineness of the share capital and premium collected by the assessee from the respective share subscribers. Since the aforesaid exercise was carried out by the second AO in the reassessment proceedings and the documents referred to above are in the assessment folder, the Second Ld. Pr. CIT erred in holding the reassessment order of the AO in respect of share capital and premium collected by the assessee as erroneous as well as prejudicial to the interest of the revenue. In the light of the aforesaid discussions and on perusal of the documents, we are of the view that AO’s view to accept the identity, creditworthiness and genuineness of the share capital and premium collected from the share subscribers was a plausible view and at any rate cannot be termed as an unsustainable view on law or facts
48. Further, we also take note that while he proposed to interfere u/s. 263 of the Act, he had opined that there was no detailed or independent enquiry but finally concluded that there was lack of enquiry. So, the Ld. Second Pr. CIT accepts that there was enquiry made by the second AO, however, he concludes that there was lack of enquiry. So when there was an enquiry conducted by AO then the AO has discharged the duty of an investigator. And we note that all the documents referred to above are available is the assessment folder before the Second Ld. Pr. CIT and he could have easily examined the veracity of these documents from the department’s data base by click of a mouse and could have recorded his finding of fact if he found anything wrong with these share subscribers and could have pointed out the adverse fact, if any, which the Second Ld. Pr. CIT has not made in the impugned order. So the inference that can be drawn is that the veracity of the factual contents of the documents running more than 330 pages could not be factually controverted by the Second Ld. Pr. CIT. And still if the Ld. Pr. CIT is not satisfied and wanted to interfere invoking jurisdiction u/s. 263 of the Act, he has to show that the enquiry conducted by AO was flawed or the enquiry conducted by AO was on a wrong direction or on wrong assumption of fact/law or that the AO misdirected himself in factual investigation or applied the law erroneously in respect of the facts collected by him. For doing so, in the facts discussed supra, he second (Ld. Pr. CIT) should himself had conducted an enquiry or at least conducted a preliminary enquiry and was able to bring some evidence/material on record to upset the AO’s satisfaction in respect of identity, creditworthiness or genuineness of the share subscribers and thus recorded a finding of fact that the decision of AO’s enquiry was faulted or wrong and in that process tried to show that it has resulted in a view which is “unsustainable in law” which would have justified his action of passing the impugned order u/s. 263 of the Act, which unfortunately is not the case. Since the AO’s view on the facts collected and discussed is definitely a possible view, so in the factual background discussed in detail, we are of the considered opinion that Ld. second Pr. CIT ought not to have interfered with the AO’s reassessment order which in any case can be classified as ‘unsustainable in law’ since it is in line with plethora of judicial decisions of the subject.
48. Further, we also take note that while he proposed to interfere u/s. 263 of the Act, he had opined that there was no detailed or independent enquiry but finally concluded that there was lack of enquiry. So, the Ld. Second Pr. CIT accepts that there was enquiry made by the second AO, however, he concludes that there was lack of enquiry. So when there was an enquiry conducted by AO then the AO has discharged the duty of an investigator. And we note that all the documents referred to above are available is the assessment folder before the Second Ld. Pr. CIT and he could have easily examined the veracity of these documents from the department’s data base by click of a mouse and could have recorded his finding of fact if he found anything wrong with these share subscribers and could have pointed out the adverse fact, if any, which the Second Ld. Pr. CIT has not made in the impugned order. So the inference that can be drawn is that the veracity of the factual contents of the documents running more than 330 pages could not be factually controverted by the Second Ld. Pr. CIT. And still if the Ld. Pr. CIT is not satisfied and wanted to interfere invoking jurisdiction u/s. 263 of the Act, he has to show that the enquiry conducted by AO was flawed or the enquiry conducted by AO was on a wrong direction or on wrong assumption of fact/law or that the AO misdirected himself in factual investigation or applied the law erroneously in respect of the facts collected by him. For doing so, in the facts discussed supra, he second (Ld. Pr. CIT) should himself had conducted an enquiry or at least conducted a preliminary enquiry and was able to bring some evidence/material on record to upset the AO’s satisfaction in respect of identity, creditworthiness or genuineness of the share subscribers and thus recorded a finding of fact that the decision of AO’s enquiry was faulted or wrong and in that process tried to show that it has resulted in a view which is “unsustainable in law” which would have justified his action of passing the impugned order u/s. 263 of the Act, which unfortunately is not the case. Since the AO’s view on the facts collected and discussed is definitely a possible view, so in the factual background discussed in detail, we are of the considered opinion that Ld. second Pr. CIT ought not to have interfered with the AO’s reassessment order which in any case can be classified as ‘unsustainable in law’ since it is in line with plethora of judicial decisions of the subject.
49. To sum up, we find from the above said facts that the Second AO has conducted enquiry as directed by the First Ld. Pr. CIT on the specific subject matter i.e. share capital and premium collected by the assessee-company. Therefore, the finding of Second Pr. CIT that the Second AO has not conducted enquiry is incorrect and is flowing from suspicion only. And as discussed, the allegation/fault pointed out by the Second Ld. Pr. CIT that the Second AO failed to collect total facts also cannot be accepted for the simple reason that Ld. Pr. CIT has not spelt out in the impugned order what he meant by total facts or in the alternative when the assessee has discharged its onus, as required by the law in force in this AY 2012-13, then the Ld. Pr. CIT ought to have called for which ever additional documents/materials or issued summons or issued notices and collected those facts which according to Second Ld. Pr. CIT, the AO omitted to collect and then demonstrated that those actions/documents which he collected in that process gave result to a different finding of fact which will turn upside down the claim of the assessee and thus able to show that the actions/omission of AO in conducting the investigation was erroneous, which unfortunately is not the case before us. And equally bad is the bald allegation/fault that second AO has not collected total facts cannot be accepted being vague and based on conjectures and surmises and so meritless. Since the assessee company has discharged its onus as discussed supra, and still if the Second Pr. CIT had to find the order of Second AO erroneous for lack of enquiry or for not collecting the entire facts, then the Second Pr. CIT ought to have called for the additional facts which he thinks that the Second AO has not collected from the assessee or the shareholders and then explained in his impugned order as to what effect those additional documents would have made on the second assessment order/reassessment order or in other words the impact on the decision making process of framing the second assessment order due to the failure of second AO’s omission to collect the additional documents. However, we note that the Second Pr. CIT has not carried out any such exercise or even spelled out in his impugned order, which all documents the second AO failed to collect for considering the total facts; and even if we presume he has conducted such an exercise, then he has not been able to bring out any adverse factual finding to upset the view of Second AO. So we find no merit in the vague allegation of second Pr. CIT that the second AO has not collected the full facts necessary to decide the issue of share capital & premium.So we note that the Second AO, the assessing authority who is a quasi- judicial office has discharged his dual role as an investigator as well as an adjudicator. Looking from another angle of doctrine of merger canvassed before us, we note from the facts of this case that the second Ld. Pr. CIT – 4 by passing the second revisional order dated 30.12.2019 has substituted the First Pr. CIT’s order passed u/s. 263 of the Act dated 31.03.2016 with his own order which he cannot do since the second assessment order/re-assessment of the Second AO dated 15.09.2016 was pursuant to the first revisional order of the First Ld. Pr. CIT and on the very same subject matter on which specific directions/instructions were given by the First Ld. Pr.CIT, which direction since having been complied by the AO, brings into operation the doctrine of merger the subject matter i.e. share capital & premium collected by assessee company. Resultantly the second Ld. Pr.CIT, again cannot rake-up the same subject matter without the second Ld. Pr.CIT in the second revisional order spells out where the error happened to second AO as an investigator or adjudicator, which exercise the Second Ld. Pr.CIT has not done, so the second Ld. Pr. CIT cannot be permitted to again ask the AO to start the investigation in the way he thinks it proper on the very same subject on which merger has taken place by virtue of the order of First Ld. Pr. CIT. And if this practice is allowed, then there will be no end to the assessment proceedings meaning no finality to assessment proceedings and that is exactly why the Parliament in its wisdom has brought in safe-guards, restrictions & conditions precedent to be satisfied strictly before assumption of revisional jurisdiction. Be that as it may be, as discussed above, we find that the Second Ld. Pr. CIT without satisfying the condition precedent u/s 263 of the Act has invoked the revisional jurisdiction (second time), so all his actions are ab initio void.
50. Lastly, coming to the observations of the Second Ld. Pr.CIT that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue in accordance with Explanation 2(c) to section 263(1) of the Act.[ For ready reference it is reproduced.] Explanation 2 under section 263 of the Act reads as under:-
For the purpose of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if in the opinion of the Principal Commissioner or Commissioner,-
(a)…………
(b)…………..
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
51. However, we note that the Ld. CIT(A) has made a bald statement that the AO’s assessment order attracts Explanation 2(c) u/s. 263 of the Act. However, he failed to spell out in his impugned order how the action of AO while framing the assessment order is not in accordance to any order, direction or instruction issued by the Board under section 119 of the Act. So, the deeming fiction as envisaged in Explanation (2) u/s. 263 of the Act cannot be used to interfere with the order of AO. This action of Ld. Pr. CIT is bad for non-application of mind. In the light of the aforesaid discussion and case laws cited supra, we find merit in the appeal filed by the assessee, therefore, we allow the appeal of assessee on the ground that since the Ld. Pr CIT has exercised his revisional jurisdiction u/s. 263 without satisfying the condition precedent as stipulated in section 263 of the Act. Therefore, we hold that the impugned action of the Ld. Pr. CIT is without jurisdiction and, therefore, is null in the eyes of law and consequently it is quashed and since we allowed legal ground raised by the assessee, the other additional grounds are left open. As discussed the impugned order of Ld Pr CIT is quashed.
52. In the result, the appeal of assessee is allowed.
Order is pronounced in the open court on 11th March, 2022.
