Case Law Details
Section 68 of the Income Tax Act is a provision that enables the assessment of any sum found credited in the books of an assessee where no satisfactory explanation is offered by the assessee to explain the same. Courts have consistently held that the three guiding principles in the context of Section 68 would be the establishment of the identity and credit worthiness of the creditor and the genuineness of the transaction. In the present case, only the first of the three conditions has been established by the assessee. Neither the credit worthiness nor the genuineness stand explained. The stand of the assessee to the effect that any transaction styled as a contribution to share capital would stand excluded from the purview of Section 68 is too wide to be accepted. The language of Section 68 does not admit of such an interpretation.
Result of inquiries carried out by the department should reveal and satisfy transparently all parameters of section 68, concurrently. In the present case, the finding of fact is to the effect that neither the credit worthiness nor the genuineness of the parties has been established by the assessee. The detailed investigations carried out by the assessing officer establish the position that the contributors to share capital were persons of insignificant means and their credit worthiness to have made the contributions has not been established. The assessing authority had put the result of his inquiries to the assessee granting him opportunity to offer its explanations. The appellant however failed to establish the genuineness of the cash contributions as well as the capacity of the persons to have made such contributions in the first place. The findings of the fact arrived at by the tribunal are accepted and nothing has been placed on record to show that they are perverse.
Dismissing assessees’ appeal the bench sustained the additions for the reason that assessee failed to establish the genuineness of the cash contributions as well as the capacity of the persons to have made such contributions.
Full Text of the High Court Judgment is as follows:-
The following Substantial Questions of Law have been admitted by this court for consideration in an appeal challenging an order of the Income Tax Appellate Tribunal dated 27.04.2007 in respect of AY 2001- 02.
‘1. Whether the Tribunal is correct in law in concluding that the assessment of share capital contribution in terms of Section 68 of the Act even though the decision of the Supreme Court in the case of M/s. Steller Investments Limited would nullify such an action in the hands of the Appellant on various grounds?
6. The aforesaid judgments of the Supreme Court has been followed by several High Courts- the Division Bench of Delhi High Court in DCIT Vs. Rana Girders (84 CCH 128), Gujarat High Court in Hindustan Inks and resins Ltd vs. DCIT (60 DTR 18), Allahabadh High Court in CIT Vs. Misra Preservers (P Ltd) (350 ITR 222) Chatisgarh High Court in ACIT Vs. Venkakateshwar Ispat (P Ltd.) ( 319 ITR 393) Delhi High Court in CIT Vs. Sri Rram Syal Hydro Power (P Ltd.) (196 Taxman 441) Punjab and Haryana High Court in Mulberry International Silk (68 DTR 149) and CIT and another Vs. Arunanandha Textiles Pvt Ltd. (333 ITR 116) and the Jurisdictional High Court in CIT Vs. Pranav Foundations in TC(A) 266 of 2014), CIT Vs. Electro Polycon Ltd (294 ITR 661) and CIT Vs. Victory Spinning Mills Ltd (90 CCH 55).
7. On the other hand, Mr. Ravikumar, learned counsel would contend that the provisions of Section 68 of the Act and the requirements there under would not stand effaced merely because the transaction happened to be projected as one of a contribution towards share capital. He would draw our attention to the following observations of the Full Bench of the Delhi High Court in Sophia Finance (Supra).
‘The Income Tax Officer would be entitled to inquire, and it would indeed be his duty to do so, whether the alleged shareholders do in fact exist or not. If the shareholders exist then, possibly, no further inquiry need be made. But if the Income-tax Officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons. The use of the words “ may be charged “ (emphasis * added) in section 68 clearly indicated that the Income Tax Officer would then have the jurisdiction, if the facts so warrant, to treat such a credit to be the income of the assessee.’8. He would also rely upon the decisions of various High Courts to similar effects such as Kolkata High Court vs. Ruby Traders and Exporters Ltd, the jurisdictional High Court in the case of Mangilal Jain Vs. ITO (315 ITR 105 ) Delhi High Court in CIT Vs. Youth Construction Pvt. Ltd., CIT Vs. MAF Academy Pvt. Ltd, CIT Vs. N. Tarika properties investments, Onassis Axles Pvt Ltd vs. CIT, Rithi Promoters P. Ltd Vs. CIT and CIT Vs. Nova promoters and Finlees (P Ltd). He would point out that the judgment of the Supreme Court in the case of lovely exports (Supra) has been considered and distinguished on facts. Reference was also made to the Judgment of the Supreme Court in the case of Sumathi Dayal Vs. CIT (214 ITR 801) and CIT Vs. P. Mohanakala (291 ITR 278) that, while not dealing with share contributions per se deal with the interpretation of section 68 of the Act and the parameters to be adopted in determining accessibility of credits appearing in the accounts of an assessee.
8. He would also rely upon the decisions of various High Courts to similar effects such as Kolkata High Court vs. Ruby Traders and Exporters Ltd, the jurisdictional High Court in the case of Mangilal Jain vs. ITO ( 315 ITR 105 ) Delhi High Court in CIT Vs. Youth Construction Pvt. Ltd., CIT Vs. MAF Academy Pvt. Ltd, CIT Vs. N. Tarika properties investments, Onassis Axles Pvt Ltd vs. CIT , Rithi Promoters P. Ltd Vs. CIT and CIT Vs. Nova promoters and Finlees (P Ltd). He would point out that the judgment of the Supreme Court in the case of lovely exports (Supra) has been considered and distinguished on facts. Reference was also made to the Judgment of the Supreme Court in the case of Sumathi Dayal Vs. CIT (214 ITR 801) and CIT Vs. P. Mohanakala (291 ITR 278) that, while not dealing with share contributions per se deal with the interpretation of Section 68 of the Act and the parameters to be adopted in determining accessibility of credits appearing in the accounts of an assessee.
10. Section 68 of the Income Tax Act is a provision that enables the assessment of any sum found credited in the books of an assessee where no satisfactory explanation is offered by the assessee to explain the same. Courts have consistently held that the three guiding principles in the context of Section 68 would be the establishment of the identity and credit worthiness of the creditor and the genuineness of the transaction. In the present case, only the first of the three conditions has been established by the assessee. Neither the credit worthiness nor the genuineness stand explained. The stand of the assessee to the effect that any transaction styled as a contribution to share capital would stand excluded from the purview of Section 68 is too wide to be accepted. The language of Section 68 does not admit of such an interpretation. In fact, it would indicate the opposite in so far as the opening words of the section are ‘Where any sum is credited in the books of an assessee….’
11. The Division Bench of the High Court in the case of CIT Vs. Steller Investment (251 ITR 263) had consider a similar case of increase in subscribed capital. The increase was accepted by assessing authority but came to be revised by the commissioner of Income Tax under section 263 of the Act on the ground that no investigation had been carried out at the time of assessment with regard to genuineness of the subscriptions. The order of revision was quashed by the Tribunal. In an appeal filed by the department before the High Court challenging the order of the Tribunal, the Division Bench held that even if it was assumed that the subscribers to the increased share capital are genuine, under no circumstances could the subscriptions be assessed as undisclosed income of the company. The only remedy available to the department was an inquiry in the hands of the alleged share contributors and an assessment of the amount in their hands, assuming that if it was found that the contributions were not genuine.
12. The aforesaid order of the Division Bench of the Division High Court was confirmed by the Supreme Court in CIT Vs. Steller Investiment (251 ITR 263) in the following terms:
16. In all, the result of inquiries carried out by the department should reveal and satisfy transparently all parameters of section 68, concurrently. In the present case, the finding of fact is to the effect that neither the credit worthiness nor the genuineness of the parties has been established by the assessee. The detailed investigations carried out by the assessing officer establish the position that the contributors to share capital were persons of insignificant means and their credit worthiness to have made the contributions has not been established. The assessing authority had put the result of his inquiries to the assessee granting him opportunity to offer its explanations. The appellant however failed to establish the genuineness of the cash contributions as well as the capacity of the persons to have made such contributions in the first place. The findings of the fact arrived at by the tribunal are accepted and nothing has been placed on record to show that they are perverse.
17. The substantial questions of law are answered in favor of the Revenue and the appeal stands dismissed without costs.
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