Case Law Details
1st proviso to Sec.68 of the Act inserted by the Finance Act, 2012 w.e.f. 1-4.2013 was only prospective in operation, we are of the view that since section 68 covers `any sum credited’ in the books without any exception, which, inter alia, includes share capital, it cannot be held that the examination of share capital with premium etc. was earlier outside the ambit of section 68 and now this amendment has brought it into its purview. The amendment has simply made express which was earlier implied. We are therefore of the view that the assessee is always obliged to prove the receipt of share capital with premium etc. to the satisfaction of the AO, failure of which calls for addition u/s 68 of the Act.
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As far as this appeal is concerned this arises out of an order passed u/s 263 of the Act revising an order passed u/s 143(3) of the Act dated 30.12.2011. In the assessment u/s 143(3) of the Act the AO has observed that the assessee has received share capital and share premium of Rs.8,80,000/- and Rs.79,20,000/- respectively during the relevant previous year. He also observed that to verify the genuineness of the share applicants notices u/s 133(6) of the Act were issued to the share applicants. Replies received from them were verified and placed and no adverse inference were drawn.
In the impugned order u/s 263 of the Act the CIT has observed that the net asset value of the company was only Rs.42.37 as on 31.03.2007 and net asset value was 78.74 as on 31.03.2008 respectively and there was no justification at a very high premium which was eight times of the share capital and that the AO failed to examine as to why such high premium was paid by a person acquiring shares of the assessee company. The CIT has also observed that the facts and circumstances under which such high premium was charged raised serious concern and about the genuineness of the transactions as well as the source of funds. The CIT also found that notice u/s 133(6) of the Act was issued by the AO only to five out of seven share holders and that no query was raised regarding the justification of the premium. Finally the CIT came to the conclusion that order of the AO was erroneous because the AO failed to make proper inquiries with regard to the receipt of share capital and share premium by the assessee. We have already set out in the earlier part of the order the directions given by CIT in the order u/s 263 of the Act. In short it is the direction of CIT that the share applicants should be summoned to find out the genuineness of the transactions in the light of the share premium paid by them and also to see that if the subsequent transfer of shares by the share holders had lower price.
The ld. Counsel for the assessee submitted before us that the only grievance of the CIT in the impugned order was justification for a high premium. It was the submission that the justification of paying high premium on shares acquired was not necessary to be examined u/s 68 of the Act prior to introduction of first proviso to section 68 of the Act by the Finance Act 2012 w.e.f. 01.04.2013 whereby it has been 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:
It was therefore submitted by him that the impugned order u/s 263 cannot be sustained. It was also submitted by him that there is no charge of money laundering by CIT in the impugned order and therefore the decision of the Hon’ble Calcutta High Court in the case of Subhlakshmi Vanijya Pvt. Ltd (ITA No.1104/Kol/2014) dated 30.7.2015 (2015) 155 ITD 171 (Kolkata) will not be applicable. The ld counsel also submitted that there was improper application of mind by CIT as he has acted on the basis of the recommendation of the AO and has not applied his mind. The ld. DR relied on the order of CIT and further submitted that the CIT has applied his mind and has duly accepted the recommendations of the AO and issued notices in the seeking which clearly exhibits application of mind by CIT.
We have considered the rival submissions. It is nobody’s case that the AO did not issue notices u/s 133(6) of the Act to some of the subscribers of the share capital, who, in turn submitted details of their PANs, bank accounts, etc., copies of which have been placed on record. The AO after getting some documents did not think it fit to make further enquires. In the light of the high share premium received by the Assessee it was incumbent on the part of the AO to examine the rationale or logic behind issuing shares at such a high premium. He ought to have examined the directors of the companies who had subscribed to share capital. No attempt was made to require the assessee to justify the charging of such a high premium and further what prompted the subscribers to purchase shares at such a huge premium when the company did not have any worthwhile net worth and was relatively a new one without any business activity. To argue that once the AO, as per his wisdom, has inquired into certain aspects of assessment which he considered relevant and, thereafter, CIT cannot intervene, is wholly untenable. If this argument is taken to its logical conclusion, then it would mean obliterating the provisions of section 263 from the statute. The Hon’ble jurisdictional High Court in the case of Maithan International 277 CTR 65 (Cal) had to consider a case where an assessee obtained loans aggregating to Rs. 1.60 crore from six private limited companies ranging between Rs.7 lac to Rs. 1.10 crore. These companies had filed their returns with nominal income. The AO mentioned in the assessment order that Inspector was deputed to verify fresh loans received during the year. The Inspector verified such loans and gave a positive report. Keeping such report on record, the AO accepted the genuineness of the transactions. The CIT invoked section 263 by observing that the report given by the Inspector was very elementary and simply mentioned that he had verified bank passbooks, Profit & loss account and Balance sheets of these companies. In none of the reports, he had commented on the issue of credit worthiness of the parties. The CIT opined that the AO was required to make proper investigation to determine whether the loans were really made by the third parties or they had come out of the sources of the assessee himself. The Tribunal set aside the order u/s 263 of the Act by observing that the AO did conduct enquiry and: “if there is an enquiry, even inadequate, that would not by itself give occasion to the ld. CIT to pass order u/s 263 of the Act.” Setting aside the order passed by the Tribunal, the Hon’ble jurisdictional High Court has laid down that : “CIT had reasons to hold that credit worthiness of the alleged lenders was not enquired into.” It further went on to hold that a mere examination of the bank passbook, Profit & loss account and Balance sheet is not enough. When the requisite enquiry was not made, the Hon’ble High Court held that, the order was to be considered as erroneous and prejudicial to the interests of the Revenue. It also set aside the view of the Tribunal on inadequate enquiry by holding that: “If the relevant enquiry was not made, it may in appropriate cases amount to no enquiry and may also be a case of non-application of mind.” It further observed that the question of inadequate enquiry should be understood in its proper perspective and: “if it can be shown that the inadequate enquiry led the AO or may have led into assumption of incorrect facts, that could make the order erroneous and prejudicial to the interests of the revenue.” Setting a bad trend has also been held to be prejudicial to the Revenue.
When we comparatively consider the facts of the instant case visa-vis those of Maithan International (supra), it can be seen that the facts under consideration are on a much weaker footing. In the present case, the AO obtained confirmations and copies of bank statements, etc., from some of the shareholders and got himself satisfied, whereas in the case of Maithan International, an Inspector was also deputed to conduct a further enquiry in addition to the collection of documents etc. as has been done in the instant cases. We are therefore of the view that the enquiry conducted by the AO was inadequate and would amount to no enquiry at all.
As to whether enquiry into high share premium ought to have been made by the AO and also as to what was the justification for such high premium could to be investigated by the AO at all because the 1st proviso to Sec.68 of the Act inserted by the Finance Act, 2012 w.e.f. 1-4.2013 was only prospective in operation, we are of the view that since section 68 covers `any sum credited’ in the books without any exception, which, inter alia, includes share capital, it cannot be held that the examination of share capital with premium etc. was earlier outside the ambit of section 68 and now this amendment has brought it into its purview. The amendment has simply made express which was earlier implied. We are therefore of the view that the assessee is always obliged to prove the receipt of share capital with premium etc. to the satisfaction of the AO, failure of which calls for addition u/s 68 of the Act. The argument with regard to non application of mind by the CIT is without any basis as all show cause notice u/s.263 of the Act were issued by him and ultimately he has passed the impugned order. There is no material brought on record to show that the CIT acted without application of mind. We therefore reject this argument on behalf of the Assessee.
We are therefore of the view that the order u/s.263 of the Act is valid and proper in so far as it relates to AY 2009-10 is concerned and we uphold the same.
