ORDER
NATHU RAM, A.M. :
These appeals are preferred by the assessee against the orders of the CIT(A) for the asst. yrs. 1986-87 and 1987-88. Since the issue involved are common these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. We first take up the appeal in ITA No. 2972/Ahd/1991 for the asst. yr. 1987-88 as that goes to the root of the issues involved. The first ground raised is against the addition confirmed of Rs. 12 lakhs by the CIT(A). The facts stated are that the assessee filed a return for the current asst. yr. 1987-88 showing an income of Rs. 32,67,890. While examining the details filed with the return the AO noted that the assessee introduced funds in the books under the title “equity shareholders money”. It was done out of the proceeds of public issue of shares and subsequent receipt of allotment money. While going through the list of share applications the AO noticed that the share issue was on all India basis but from the names of the shareholders it appeared that they were from Nasik region where the assessee-company was operating. He further noted that the share applications applied for shares were in the numbers of 400, 500 and 600 shares barring few applications whereas normally applications for share are for lots of 50, 100, 200, 300 and most of the applications are for 50 to 100 shares. The AO called for share register and share application forms and on their scrutiny he further found that most of the share applications were written in handwriting of 4 to 5 persons and signatures of subscribers were illegible. It also gave the impression that the subscribers were primarily of illiterate class. With a view to verify, the AO sent enquiry letter to the shareholders. A large number of letters were received from the shareholders. However, according to the AO, substantial number of letters issued came back with the remark “person non-existent or not available on addresses”. He further noticed that all share applications were deposited in Canara Bank, Nasik, barring few exceptions and share application money was deposited in cash and not by cheque or bank draft. Further, the confirmatory letter received indicated that the persons were illiterate and the replies were written by others and they merely signed them. They had income in the range of Rs. 9,000 to Rs. 14,000 at the time of enquiry but at the relevant time their income was Rs. 4,000 to Rs. 5,000. Further, a large number of shareholders were employees of a sister concern. According to the AO, these facts were not denied by the assessee. The AO observed that once the shareholders are proved to be employees of the assessee or its sister concern and they did not have financial help to save money invested in shares the onus shifts, to the assessee to prove the genuineness of the investment made.
2.1. The AO further noted that large number of shareholders sold shares to M/s. Sarda Pariwar Vitta Vyavastha Ltd. (Sarda for short) in cash at face value. He also noted that the assessee-company was floated by Shri Kisanlal Sarda and his wife Smt. Kiran Sarda and they were the first two shareholders of the assessee-company and Sarda is their investment company. The AO further noted that there are several common features in the confirmatory letters received from the shareholders such as everybody used common and similar stationery including the postage envelop and stamp, replies were in the handwriting of few persons, each reply used common language, replies received showed that several senior employees of the assessee-company were involved in getting share application filled in, the shareholders had not disclosed any investment in other shares and the shareholders invariably used the sale proceeds of shares for household consumption and they had not deposited the same amount in the bank or in any other investment.
2.2. The above facts were brought to the notice of the assessee and the assessee gave explanation through various letters. The AO was however, not satisfied with the explanation given by the assessee on the various issues raised about the genuineness of the public issue and allotment of shares. The AO received letters from two shareholders Shri Patrick Pereira and Shri A. N. D. Dwivedi who had applied for 50/100 shares each and they doubted the genuineness of the shares and they inquired whether the share issue was a hoax. The AO further noted that no dividend was declared even when the assessee-company disclosed an income of Rs. 65,62,000 against the share capital of Rs. 20 lakhs. The company further made donation of Rs. 5,15,000 to charitable institutions related to the promoters.
2.3. The AO also noted that several letters of shareholders came from the same post office and despatched on the same date. The registration numbers are in the serial order and that shows that the said shareholders came in a group and sent the confirmatory letters together from the same post office. He also noted that confirmatory letters also came from certain shareholders from whom no enquiry was made but they being employees of the sister concern of the assessee-company sent the confirmation letters suo motu. The AO also found certain letters intimating that they never subscribed to the shares. The assessee-company was confronted with a letter and statements recorded and in reply the assessee filed a letter from one of its persons denying the facts written in his letter to the AO. The subsequent letter so filed was not found reliable as the said shareholder was not produced for examination on oath. About the remaining shareholders the assessee gave no satisfactory reply.
2.4. In view of the facts and circumstances discussed above, the AO held that sum of Rs. 12 lakhs credited in the books of accounts during the year by way of share application money and share allotment money represented unaccounted money of the assessee and the same was added in the total income.
3. On appeal, it was contended on behalf of the assessee that the share capital issue is genuine and the AO wrongly taxed the same at Rs. 12 lakhs based on presumption. It was also claimed that unusual features of the subscription of the said amount of Rs. 12 lakhs cannot render the issue as bogus. It was also contended that out of the sum of Rs. 12 lakhs, sum of Rs. 6 lakhs pertained to the accounting year relevant to the asst. yr. 1986-87 and accordingly, the said sum of Rs. 12 lakhs cannot be added as the assessees income. The first appellate authority confirmed the action of the AO in taxing the unexplained income of Rs. 12 lakhs in the form of share application and share allotment money and he directed the AO to verify the assessees claim that sum of Rs. 6 lakhs pertained to the asst. yr. 1986-87 and to take necessary action as per law in this regard with the following observations :
“I have considered the facts and the appellants submissions. It may be mentioned that the AO has passed a very detailed assessment order. The AO has discussed in detail the numerous unusual features and coincidences as also various infirmities in the appellants case. After discussing the various infirmities in the appellants case, the AO has held that through the so-called public issue of shares, the appellant has tried to turn itself into a widely held public limited company. The AO has also mentioned that subsequently most of the shares held by the alleged shareholders have been transferred at their face value to an investment company in which the directors of the appellant company are interested. By resorting to this method, the appellant has transferred the shares through the medium of the alleged shareholders to the said investment company with all the benefits of dividends and the saving/reduction of capital gains tax/gift as and when the investment company transfers its shares………….”
4. The learned authorised representative of the assessee has made a submission that the assessee-company was engaged in manufacturing of Bidi in backward areas of Andhra Pradesh. The accounting year was ended on 30th April, 1986. It is submitted that in the month of March, 1985, the company offered 1,20,000 equity shares of Rs. 10 each to the public subject to the terms set out in the prospectus issued by the company. Before coming out with the public issue necessary legal formalities under the Companies Act were complied with. Prospectus was filed with the Registrar of Companies, Gujarat, and listing application was made to Ahmedabad Stock Exchange on 2nd Feb., 1985. Ahmedabad Stock Exchange granted listing permission. PAM Consultants were appointed as managers to the issue in 1984 so as to process the planning and co-ordination of the public issue and they duly consented. Canara Bank was appointed as bankers to the issue and the bank gave necessary consent. Further, 13 brokers spread all over the country were appointed. Advertisements about the public issue were released in the newspapers and the same appeared in the Times of India and Gujarat Samachar. Prospectus and share application forms were despatched to various stock exchanges in the country. Canara Bank was authorised to collect application forms and application money. The learned authorised representative has further submitted that though efforts were made to attract general public spread all over India the promoters were fully aware of the fact that they were not the industrialists of all India fame and having reconciled with the situation they looked to Nasik region for their support where they were well-known for their enterpreneurial forays and their penchant for social/religious work. Predictably almost the entire support came from Nasik region and out of total of 281 applications received 273 applications were collected by Nasik branch of Canara Bank and of the balance 5 were from Delhi and 3 from Bombay. The issue was oversubscribed. The assessee-company received Rs. 6,90,250 on account of share application money and accordingly, a sum of Rs. 6,90,250 is reflected in the balance sheet of the company as on 30th April, 1985, relevant to asst. yr. 1986-87. The excess application money of about Rs. 90,000 was refunded to the subscribers in the current assessment year. During the current year call for payment of allotment money being Rs. 5 per share was made and in response the balance amount of Rs. 5,99,750 was collected. Thereon the share allotment letters were issued to the subscribers. The assessee-company incurred share issue expenses of Rs. 54,171 during the period relevant to the asst. yrs. 1986-87 and 1987-88.
4.1. The learned authorised representative has further made a submission that the AO started making enquiry about the share money of Rs. 12 lakhs with suspicious mind during the current year. In compliance the assessee produced Members Register, Transfer Register and Share Application Register and complete list of shareholders with their names and addresses was also given. The AO wrote letters to all shareholders requiring them to confirm to have subscribed to the public issue. He further made a submission that thereon the AO wrote a letter dt. 9th Jan., 1990, requiring certain information and the same was complied with by the assessees letter dt. 23rd Jan., 1990. The AO then further through order-sheet entry dt. 9th Feb., 1990, required further information and explanation and the required details were given vide letter dt. 7th March, 1990. The AO further required certain information vide letter dt. 7th March, 1990, and the same was supplied by the assessee-company vide letter dt. 12th March, 1990. On 27th March, 1990, the AO wrote the order-sheet running into several pages raising several doubts as has been mentioned in the assessment order about the genuineness of the public issue and the assessee gave detailed reply point to point in its letter dt. 29th March, 1990, running into 12 pages.
4.2. The learned authorised representative arguing further has contended that in the confirmation letter the shareholders have nowhere stated that they were approached to subscribe to the shares by people in employment of Sarda Group and motivated by friendship. As most of the subscribers were illiterate they took help of other persons to fill up the application forms. As regards their capacity to invest it has been submitted that the AO made the assumption that the annual income was Rs. 4,000 to Rs. 6,000 at the time of subscription and their present annual income was Rs. 9,000 to Rs. 13,000. The subscribers were required to pay only 50% at the time of application and the balance 50% was to be paid at the time of allotment of shares. So, in the case of application of 400 to 500 shares the shareholders in employment could easily invest Rs. 4,000 to Rs. 5,000 in two equal instalments of Rs. 2,000 to Rs. 2,500. The subscribers were either self-employed or serving somewhere and their income was also supplemented from agriculture. They had thus the capacity to invest in the shares. It is also claimed that the fact that the shares were sold by subscribers in cash did not make any difference. Stating further the learned counsel submitted that as the assessee-company did not declare the dividend and the shareholders did not anticipate bright future they might have sold the shares at the face value or even at loss. It is also contended that in majority of the cases the shareholders confirmed in their own handwriting though it was not ruled out that some subscribers who were illiterate might have got the confirmation letter written by someone who was literate and knowledgeable. As regards the non-confirmation of investment by certain shareholders it was submitted by the learned authorised representative that they went against the company with a view to intimidate for their collateral gain. It has also been claimed that only a sum of Rs. 19,000 remained unconfirmed out of the total share money of Rs. 12 lakhs. The learned authorised representative has therefore, submitted that the first appellate authority has not appreciated all these facts properly while confirming the addition made.
4.3. The learned authorised representative has argued that the impugned addition was not based on any material. The identity of the investor, genuineness of the transaction and capacity of the investors were proved as all the investors except five persons confirmed the subscription made in the shares of the company and their capacity was also proved as they were either self-employed or employed in various companies. What is apparent is real unless the contrary is proved. It is well settled that the assessment has to be based on hard rock of facts and not presumptions and surmises and in support he placed reliance on the following decisions of the Honble Supreme Court :
Dhirajlal Girdharlal vs. CIT (1954) 26 ITR 736 (SC), Dakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 755 (SC), Omar Salay Mohamed Sait vs. CIT (1959) 37 ITR 151 (SC) and Lalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 288 (SC).
The learned authorised representative emphasised that there should be something more than bare suspicion to support the addition. The finding of fact is vitiated if it is based partly on conjecture or on material which is partly inadmissible or irrelevant even though there may be other relevant or admissible material to support the finding.
4.4. Arguing further it has been contended that the issue was genuine and not a single complaint was lodged under Companies Law or IPC or under any other law showing that the issue was bogus or non-genuine. The material on record proved that it is the applicants and allottees of shares whose names appear in companys register and they are the real and beneficial owners of the shareholding. He further referred to s. 68A of the Companies Act as per which any person who makes in a fictitious name an application to the company for accepting or subscribing for share or otherwise inducing the company to allot the share in fictitious name is punishable for a term which may extend to 5 years. Reference to this section has compulsorily to be given in the prospectus. According to the learned authorised representative no one is prosecuted for violation of this section and that implies that all the shareholders were genuine and identifiable. The learned authorised representative has also pointed out that on a reference made by the AO 66 shareholders have confirmed the purchase of shares to the office of the DDI, Nasik. The rest of the shareholders sent their confirmation letters directly to the AO.
4.5. As regards the amount of Rs. 19,000 involving 5 shareholders who denied having willingly made the applications for shares, it has been explained that these persons should have been summoned for cross-examination but the AO failed to do so. Out of the five persons Shri Eknath Narayan Zagde and Shri Vishnu Dagdu Savant were not allotted the shares and their application money was refunded. Shri Dattaraya Vithoba Gholap was removed from service by Sinnar Bidi Udhyog Ltd. on account of fraud committed by him and the same was reported in Lokmat Marathi Daily. He took the opportunity to show the company in bad light. He however, sold the shares on 8th July, 1986, to Sarda at face value. A copy of debit voucher showing disbursement of Rs. 4,000 towards purchase of shares by Sarda is filed in the compilation. It is contended that unless he had purchased the shares he could not have sold them. As regards Prabhakar and Sanjay it has been submitted that share application was signed and money was paid by them and shares were also allotted to them. They have given false statement behind the back of the assessee. Moreover, both had sold their shares to Sarda. In support, the learned authorised representative has filed copy of debit voucher issued by Sarda to Prabhakar. In respect of Sanjay a copy of his application form for seeking job and three transfer forms have been filed in the compilation. Shri Sanjay also sold shares. In the statement recorded by the AO Shri Sanjay deposed that the signature appearing on the share application form is really his signature. He also gave a wrong statement that his signature were tactfully taken as his services with Sinnar Bidi Udyog Ltd. were terminated.
4.6. It is further submitted that most of the subscribers subsequently sold shares but that does not alter the situation. It is not all the shares that have been sold to associate companies. Most of the shares were sold through brokers and in that case price of share was paid through demand draft. Further, shares were sold by subscribers at the face value and not at loss. It is also not the case of the Revenue that the sale proceeds of shares was given back to purchaser of shares by sellers as the AO has himself noticed that sale proceeds of shares has not been used by the subscribers for making investment but the proceeds were consumed in their household.
4.7. Taking the legal ground the learned authorised representative has submitted that the AO has not made the addition as per the deeming provisions of s. 68 but he has taxed Rs. 12,00,000 as business income of the assessee. When it is taxed as a business income the burden was on the Department to show that particular receipt is the income of the assessee-company. Such a burden has not been discharged by the Department. Even if it is assumed that s. 68 has been impliedly invoked by the AO the onus lying on the assessee stands discharged as identity of the shareholders, genuineness of transaction of share subscription and capacity of the subscriber has been established. Even if it is assumed for arguments sake that the capacity of the shareholders to invest has not been established to the satisfaction of the AO, addition cannot be sustained in view of the Full Bench decision of the Honble Delhi High Court in the case of CIT vs. Sophia Finance Ltd. (1994) 205 ITR 98 (Del) (FB) read with decision of the same High Court in the case of Settler Investment Ltd. (1991) 192 ITR 287 (Del) wherein it was held that if the shareholders are identified and it is established that they had invested money in the purchase of shares then the amount received by the company would be regarded as a capital receipt. On the other hand, if the assessee offered no explanation at all or the explanation offered is not satisfactory then the provisions of s. 68 may be invoked. He also invited our attention to the decision of the Honble Delhi High Court in the case of CIT vs. Kwick Travels (1993) 199 ITR 85(St) wherein the Honble High Court rejected the application made by the Revenue under s. 256(2) of the Act while directing the Tribunal to frame question of law whether the Tribunal was right in deleting the addition under s. 68 of the Act on account of share capital raised during the year genuineness of which was not proved to the satisfaction of the AO mainly because the assessee failed to establish the creditworthiness of shareholders and whether the Tribunal was right in holding that onus cast on the assessee under s. 68 of the Act does not extend to proving the source of funds. The SLP filed by the Department in this case was rejected by the Honble Supreme Court as reported in (1993) 199 ITR 85 (St).
4.8. The learned authorised representative has, therefore, pleaded that both on facts and in law the addition made on account of shares subscription money is unjustified and the same deserves to be deleted.
5. The learned Departmental Representative, on the other hand, has placed heavy reliance on the orders of the lower authorities. He has further submitted that the AO has elaborately discussed the issue involved and that addition made is duly supported by the material brought on record. The first appellate authority has confirmed the addition made on due appreciation of all the facts and material available on record. He further contended that there is sufficient and adequate material to support the addition. He has further submitted that looking to the unusual features of the public issue pointed out at length by the AO it cannot be said that the said amount was invested by the so-called subscribers who in fact were incapable of making the investment. Further, some of the shareholders denied having invested. According to the learned Departmental Representative, though the identity of most of the subscribers was established but genuineness of the transaction and their capacity to invest has not been proved to the satisfaction of the AO and in view of the case law cited on behalf of the assessee the addition has rightly been made in view of the provisions of s. 68 of the IT Act. The learned Departmental Representative, therefore, pleaded that the addition made being fully justified requires no interference.
6. We have given careful consideration to the facts, material on record and the rival submissions made before us. We find that the assessee-company was originally incorporated on 22nd Oct., 1980, as a private limited company in the name of Rasbihari Tobacco Processors Pvt. Ltd. It was changed into a limited company as per order of the Asstt. Registrar of Companies, dt. 5th Sept., 1984, under the name and style of Rasbihari Tobacco Processors Ltd. The company was engaged in manufacturing of Bidi in the State of Andhra Pradesh. Its accounting year ended on 30th April of each year. The accounting year for the current asst. yr. 1987-88 has ended on 30th April, 1986. The first issue that arises is whether the public issue floated by the company was genuine. We find that on changing the company into public limited in 1984 the assessee planned to float public issue. 79,000 equity shares of Rs. 10 each were reserved for firm allotment to the employees, directors and business associates, etc. The company offered to the public for subscription remaining 1,20,000 equity shares of Rs. 10 each through a prospectus. Earlier there were only 300 equity shares of Rs. 10 each fully subscribed and paid. As per the prospectus issued the Board of Directors were constituted by S/Shri Champalal Kasturchand Baphana, Arun Kanhyalal Burad and Hiralal Hemraj Chandaliya. Its registered office was at Surat and factory was in Subhash Nagar, Sirsilla Dist., Karimnagar, Andhra Pradesh. Shri S. D. Bedmutha of Nasik was appointed director and Shri P. V. Jadhav of Nasik was appointed as legal advisor to the issue. Canara Bank was appointed as bankers to the issue. Ram Financial Consultants Pvt. Ltd. of Bombay were appointed as manager to the issue. The company also appointed brokers to the issue at Ahmedabad, Bombay, Bangalore, Calcutta, Cochin, Gauhati, Hyderabad, Indore, Kanpur, Ludhiana, Madras, New Delhi and Pune. As per the prospectus the objects of the issue were to finance operations of the company, obtain listing of companys existing and new equity shares on Ahmedabad Stock Exchange and to meet the expenses of the issue. The issue was opened on 11th March, 1985, and closed on 14th March, 1985. The application was to be made for a minimum of 50 shares or in multiple thereof in the prescribed form and same were to be deposited along with the application money at the rate of Rs. 5 per share in Canara Bank. The payment was to be made in cash or by cheque or bank draft. The auditors, bankers, managers, etc. confirmed their appointment in writing to the company. The assessee-company forwarded prospectus and application forms to various stock exchanges, brokers, employees, associates, etc. inviting subscription to the issue. Advertisements were also released in Times of India and Gujarat Samachar on 28th Feb., 1985, about floating of the public issue and inviting to the subscription to the issue. This shows that every effort was made to attract public participation in the issue all over the country by promoters of the company. Listing application was made to Ahmedabad Stock Exchange on 2nd Feb., 1985. The promoters of the company looked forward for support from Nasik region where they were well-known. Admittedly, almost the entire support came from Nasik region. There were 281 applications received out of which 273 applications were collected by Nasik branch of Canara Bank and of the balance 5 were from Delhi and 3 from Bombay. The issue was oversubscribed as the assessee-company received total amount of Rs. 6,90,250 on account of share application money. The amount so received was reflected in the balance sheet of the assessee-company as on 30th April, 1985, relevant to the asst. yr. 1986-87. The excess application money of Rs. 90,000 was however, refunded in the current asst. yr. 1987-88. This is evident from the documents filed at page Nos. 17 to 20 of the compilation. The assessee in the current year gave a call for payment of call money being Rs. 5 per share and the balance amount of Rs. 5,99,750 was collected Rs. 250 being calls in arrears. The company thereon issued allotment letter of shares to the subscribers and a specimen copy of the allotment letter is filed at pages 42 and 43 of the compilation. The assessee-company incurred expenses of Rs. 54,171 on share issue in the accounting year relevant to the asst. yrs. 1986-87 and 1987-88 details of which have been filed at pages 21 and 22 of the compilation. The share money so received was shown in the balance sheet as equity shareholders money both for asst. yrs. 1986-87 and 1987-88. The assessee-company also maintained necessary record such as members register, share application register, transfer register, etc. as per requirement of the Companies Act. It is evident from the facts given above that the public issue floated by the company was as per the procedure laid down and requirements of the Companies Act and there is nothing to doubt the genuineness of the public issue raised by the assessee-company.
6.1. The next question that arises is whether the subscription was made by genuine persons or it was the promoters of the assessee-company who made subscription out of the unaccounted funds of the company in fictitious names. Admittedly, most of the subscribers are from Nasik region but the applications were also received from New Delhi and Pune. Though the share issue was on all India basis but the assessee being well-known in Nasik region most of the shares were subscribed from there. It so appears that the AO entertained doubts about the subscribers for the reason that share applications were found written by 4-5 persons. The subscriptions were from labour class and illiterate and they were not capable of making the required investment as according to the enquiry made the shareholders had shown their income in the range of Rs. 9,000 to Rs. 14,000 at the time of enquiry and during the relevant period their income was considered not more than Rs. 4,000 to Rs. 6,000. The AO wrote directly at the addresses given to the shareholders to confirm having invested in shares and he also required the DDI, Nasik, for enquiry and report. We find that almost all the shareholders from Nasik region either directly or through DDI, Nasik, in confirmatory letters had confirmed having subscribed to the share and they also gave the source of investment such as proprietary business, salary, agricultural income, rent, etc. However, there were only 5 shareholders involving an investment of Rs. 19,000 who did not write favourably and according to the assessee-company they did so for their own reasons. According to the assessee-company, Shri Dattatray Vithoba Gholap was serving with Sinner Bidi Udhyog Ltd. His services were terminated on account of fraud committed by him. Sinner Bidi Udhyog is an associate concern. According to the assessee-company on account of termination of his services he took the opportunity to show the assessee-company in bad light. According to the assessee, the said letter was written to the AO by his pleader and in the submission made before the AO it was claimed by the assessee that the whole truth would come out if the person is examined in the presence of representation of the assessee-company with right to cross-examine. We find that the assessee-company was never afforded an opportunity to cross-examine Shri Gholap about the complaints made by him. We, however, note that he transferred his share to Sarda at face value.
6.2. Another such person was Shri Sanjay Pathak. According to the assessee-company, share application was signed by him. Money was paid by him and shares were also allotted to him. Here also the assessee-company asked the AO to give them an opportunity to cross-examine him but it so appears that nothing was done in this regard. According to the assessee-company, he also had an ulterior motive in making a damaging statement as he wanted to utilise the opportunity for settling his scores with the company in that he wanted to use the good offices of the Department in securing his provident fund and terminal dues. This aspect has not been appreciated by the authorities below.
6.3. As regards the other two persons Shri Eknath Narain Zagade and Shri Vishnu Dagdu Savant it is claimed that they were not allotted shares and their application money was refunded. There was, therefore, no allotment of shares made in their names. Another person was Shri Prabhakar Balaji Kankuse. According to the assessee-company, the share application was filed by him and money was also paid by him. The shares were allotted to him. He also gave a statement at the back of the assessee-company. He also ultimately sold his share to Sarda at face value. On due consideration of the facts given we find substance in the explanation offered by the assessee-company. Moreover, the AO obtained statements at the back of the assessee and the assessee was never offered an opportunity to cross-examine them to bring out the truth. Since the AO failed to do so, no adverse inference can be drawn on their statements in the face of the detailed explanation given by the assessee about the damaging statement given by them. Moreover, the amount involved in respect of these five persons was only of Rs. 19,000 and on the basis of the statements given by them the whole amount of share application money received from subscribers of Rs. 12,00,000 cannot be doubted.
The AO has treated the whole amount of share money as unaccounted money of the assessee-company. Since the amount so received was credited in the books of the assessee-company it could impliedly be a deemed income under s. 68 of the IT Act. It has, therefore, to be considered whether the identity of the shareholders is established, the genuineness of the transaction is proved and their capacity to invest in shares is established. We note that except 5 persons mentioned above all other shareholders have confirmed either directly or through DDI, Nasik, having made investment in shares of the assessee-company in response to the enquiry letter issued by the AO as well as the DDI, Nasik. The questionnaire issued to them included a long list of queries made and the same were duly replied by each of the subscribers from Nasik region. The AO or the DDI has not made any independent enquiry directly from the shareholders and there is nothing on record to show that the confirmatory letters received by the assessee-company were not sent by the real shareholders but the same were managed by the promoters in benami names. In the absence of any such material their identity stands established from the confirmatory letters sent by them. We also note that the DDI, Nasik, got such confirmatory letters from more than 60 shareholders and confirmatory letters received through DDI have been authenticated by the Inspector of Income-tax. The identity of the shareholders, therefore, stands established.
6.4 As regards the capability of the shareholders to invest, we note that all the shareholders in the confirmatory letters had given the source of investment in the shares such as income from proprietary business, salary, house property, interest income, agricultural income, etc. The AO has picked up income of certain shareholders at the relevant time at Rs. 4,000 to 6,000 but he has not considered the savings written by them from other sources like agricultural income, interest, house property, etc. in each and every case. Moreover, the investment in each case is not more than Rs. 5,000 and looking to the source given it cannot be said that the shareholders were not capable of investing the said amounts in shares.
6.5. As regards the genuineness of the transactions we note that subscribers from Nasik region submitted application forms along with application money in Canara Bank, Nasik, and the bank in turn forwarded the said application and remitted the amount collected to the assessee-company. Many of the shareholders of the Nasik region consequently transferred their shareholding through broker Rajesh Jhaveri of Ahmedabad and the payments were received by them through demand draft. Shares were also acquired by associate concerns of the assessee-company such as Sarda Srirag Tobacco Processors Ltd. and Kiran Tobacco Products Ltd. and payments were made by them in cash. According to the AO, sale proceeds of shares were not invested by them elsewhere but the same were consumed in their household. This shows that on transfer the sale consideration was received by the said shareholders and the same was also utilised by them. Had they been benami of promoters of the assessee-company, sale proceeds would not have gone to them for their personal utilisation but the same would have been retained by the promoters themselves. On these facts and circumstances, we are satisfied that the transaction of purchase and sale of shares by the said shareholders were genuine.
6.6. It is evident from the facts given that there is sufficient material on record to establish the identity of the shareholder, his capability to invest and genuineness of the transactions and the position being so the equity share money cannot be held as a deemed income of the assessee-company.
6.7. This view is fully supported by the cases relied upon by the assessee in the latest decision of the Honble Delhi High Court in the case of CIT vs. Sophia Finance Ltd. (supra) wherein the ratio of decision of Honble Supreme Court in the case of CIT vs. Biju Patnaik (1986) 160 ITR 674 (SC) was applied. In the aforesaid case the Honble High Court has held the view that where a company claims that it has issued share on the receipt of share application money the amount so received would be credited in the books of accounts of the company and the AO would be entitled to enquire whether the shareholders did in fact exist or not. The Court has further observed that if the shareholders exist then possibly no further enquiry needs to be made. Further, in the case of CIT vs. Settler Investment Ltd. (supra) the Honble Delhi High Court has held a similar view to the effect that if the shareholders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regarded as a capital receipt. As has been seen from the facts discussed above in the present case the shareholders are identified and it is also established that they invested money in the purchase of shares there being no evidence to prove to the contrary. The amount received as equity share money has therefore to be regarded as a capital receipt.
6.8. We also note that the AO in his order has highlighted certain unusual features of the public issue and having greatly influenced by that he treated the issue as not genuine and share money received as income of the assessee-company. Let us see how the features of the public issue were unusual as to draw such an adverse inference against the company. It is alleged that application were made for shares in numbers of 400, 500, and 600 whereas normally it should have been for 50, 100, 200, etc. We note that according to the terms of the prospectus the application for share was to be the multiple of 50, and making of application for 400, 500 etc. was not in any way against the terms of the prospectus, the same being in the multiple of 50. There is a further allegation that application money was deposited in the bank in cash whereas the same was to be paid by cheque or bank draft. We have noted above that as per terms of the prospectus the application money was to be deposited either in cash or by cheque or bank draft. The prospectus thus permitted the deposit by cash and thus payment made by the subscriber in cash along with the share application was fully in accordance with the terms of the prospectus. Further allegation made is that the subscribers are from Nasik region whereas the public issue was opened all over India. We would like to observe that the assessee-company had given publicity to the public issue on all-India basis and prospectus as well as application forms were sent to all stock exchanges in the country but as the assessee-company was known in the Nasik region on account of enterpreneurship of its promoters and their charitable activities the people from Nasik region responded in great number though subscription also came from Delhi as well as Pune. Moreover, this aspect would not make the public issue as well as shareholders as non-genuine. There is also an allegation that the application forms from Nasik region were found written in the handwriting of 4-5 persons. Admittedly, most of the subscribers were illiterate and obviously they sought help from literate persons in filling up the forms but each subscriber has signed or completed the application form and none of them had denied having not made the said application form on their own volition. Further, the confirmatory letter written by the subscribers through more literate persons in common language would not make the issue non-genuine. We also note that two of the subscribers S/Shri Pereira and Dwivedi in their letters written to the AO doubted the genuineness of the company and the public issue but the facts given about the existence of the company and the public issue floated leave no scope for any doubt on this score. There is also an allegation that the assessee-company has not declared any dividend during the year. We find that from the asst. yr. 1989-90 onwards the net profit of the company after tax effect raised from Rs. 29 lakhs to Rs. 73 lakhs and it also declared dividend at 10%. Moreover, in the year under consideration the funds were raised through the public issue and there cannot be expectation for dividend in the very first year of the public issue.
6.9. Considering all the facts and circumstances involved, we have no hesitation in holding that the public issue raised was genuine and it was the shareholders who invested money in share and their identity is fully established. In this view of the matter, the share money received is held to be the capital receipt and addition made on this count is directed to be deleted.
7. The second ground raised by the assessee is that the learned CIT(A) erred in confirming the disallowance of Bardana purchase expenses amounting to Rs. 4,87,109. The assessee had shown purchase of bardana of the above amount from the following co-operative societies :
Siddarth Bidi Producers, Sireilla
Rs. 3,22,000
Raj Rajeshwar Bidi Producers Co-op. Society, Karimnagar
Rs. 1,65,109
The bardana purchased was utilised for stacking tobacco. The payment made to the said societies was claimed to be through cheques. The enquiries made by the AO from Canara Bank revealed that the payment in cheque was made to Sinnar Bidi Udyog Ltd. When required to explain such discrepancy about the payee the assessee produced copies of letter from both the co-operative societies to the effect that as per the credit standing in their books the assessee-company was asked to pay the amount to Sinnar Bidi Udyog Ltd., Nasik, on their behalf and to debit their accounts accordingly. The AO doubted the letter so received as both the letters received from the co-operative societies were in identical language and the type set was common. According to the AO, these letters were typed in the office of the assessee-company. The sale bills were also produced before the AO and therefrom it was found that these bills were printed on the letter-head of the society and not on the bill book and the bills were also typed on electronic typewriter possessed by the assessee-company. The AO also made enquiries about the co-op. societies from ITO, Karimnagar. Photocopies of bills issued by the co-op. societies as received were not found tallied with the original bill submitted by the assessee-company. In this view of the matter, the AO treated the purchase of bardana from two societies as unexplained expenses and the same was disallowed. On appeal, the disallowance so made was confirmed by the CIT(A).
8. The learned authorised representative of the assessee has made a submission that the assessee-company on 30th April, 1986, made said purchases of bardana along with phalbodh of a total amount of Rs. 3,74,801 from Raj Rajeshwar Bidi Producers Co-op. Society and that from Siddharth Bidi Producers at Rs. 3,28,783. Both the sellers issued authority letters to the assessee-company to make payment on their behalf to Sinnar Bidi Udyog Ltd. as per letter placed at pages 109 and 110 of the compilation. Accordingly, the assessee-company made the payment through cheques to Sinnar Bidi Udyog Ltd. of Rs. 3,28,783 on 27th Jan., 1987, on behalf of Siddharth Bidi Society and payment of Rs. 3,74,800 was made through cheque on 18th Aug., 1986, to Sinnar Bidi Udyog Ltd. on behalf of Raj Rajeshwar Bidi Producers Co-op. Society. Copies of accounts of the society as appearing in the books of Sinnar Bidi Udyog Ltd. are placed at pages 117 and 118 of the compilation. He further made a submission that the assessee also made payment for purchase of phalbodh from both the societies over and above the payment for bardana but the same has been accepted as genuine whereas purchase of bardana has been doubted. He has further made a submission that the AO made a reference to the ITO, Karimnagar enquiring about the genuineness of the bardana purchased and in turn the ITO, Karimnagar, made enquiries from the Presidents of the societies and as far as they know the ITO, Karimnagar, has sent a positive report to the AO confirming the purchase of bardana made. The copy of report of ITO, Karimnagar, obtained from the records of the AO has been placed before us for perusal. The learned authorised representative has further pleaded that the AO disallowed the claim of bardana purchases merely on suspicion and surmises and even on having a positive report from the ITO, Karimnagar, he has disallowed the said purchase amount.
9. The learned Departmental Representative on, the other hand, placed reliance on the orders of the lower authorities.
10. We have considered the facts, rival submissions and material brought on record. Admittedly, the assessee has made payments through cheques to Sinnar Bidi Udyog Ltd. on behalf of said two societies as per their instructions and this is confirmed from the copies of accounts furnished. The AO has not doubted the payments made. The ITO, Karimnagar, in his letter dt. 15th March, 1990, addressed to the AO has sent a detailed report. This letter of ITO, Karimnagar, has reported that Presidents of both the societies have confirmed that they sold bardana to the assessee-company. The original sworn statements of both the Presidents together with copies of audit reports of societies upto the co-operative year 30th April, 1986, along with copies of bills and order of CTO, Jagtial, were sent along with the report. The ITO has further reported that both the societies have not purchased bardana as such. They purchased bidi leaves inclusive of gunny bags during the period from 1980-81 to 1984-85 and the same were distributed to various centres under their societies. The empty gunny bags appear to have been collected. The Presidents of the societies also confirmed that they collected empty bardana from various centres and showed this stock as on 30th June, 1984. The bardana stock was also shown in the audit report of Siddharth Bidi Producers Co-op. Society. The same was sold on 30th April, 1986, to the assessee-company and the same was also subjected to assessment by the CTO, Jagtial. In the case of Raj Rajeshwar Bidi Producers Co-op. Society closing stock was shown at Rs. 4,86,307 but on the sale bills effected on 30th June, 1986, it seems that stock of empty bardana to the tune of Rs. 1,65,109 was available on 30th June, 1984, which was sold on 30th April, 1986, and the same was also subjected to sales-tax by the CTO, Jagtial. He further reported that the goods were delivered to the branch of the assessee-company at Sirsilla vide bill dt. 30th April, 1986. He has also reported that both the societies went into liquidation in the year 1987 and the account books were handed over to the liquidator. He also reported that transactions with Sinnar Bidi Udyog Ltd. by the societies were genuine inasmuch as the societies carried on business as per agreement and assistance of Sinnar Bidi Udyog Ltd. from the date of their inception 1st June, 1980. The liquidator in his letter dt. 9th March, 1990, also confirmed to the ITO, Karimnagar, that the Presidents who were in charge of the affairs of the society till he took over have confirmed the transactions. The report of the ITO, Karimnagar, therefore, leaves no room for doubting the genuineness of the purchase of bardanas from the two societies. We accordingly, vacate the finding of the first appellate authority and direct the AO to delete the disallowance made on this count of Rs. 4,87,109.
11. The last ground raised by the assessee is that the learned CIT(A) erred in not directing the AO to give the assessee relief under ss. 80-I and 80HH on the income assessed in its hands barring its dividend income. We note that the assessee had taken an additional ground before the CIT(A) to the effect that there is a mistake in the AOs computation of relief under ss. 80HH and 80-I. The CIT(A), therefore, directed the AO to verify the assessees claim and to give appropriate relief found due, if any, as per law after affording reasonable opportunity of being heard to the assessee.
12. The learned authorised representative of the assessee has made a submission that the assessee-company had no income other then income from manufacturing of bidi in the industrial undertaking where deduction under ss. 80HH and 80-I is claimed and the same has actually been allowed on the income declared. The AO however, made addition as business income on account of share money and not under deeming provisions. He has, therefore, without prejudice submitted that if any part of the addition is sustained the deduction under ss. 80HH and 80-I be given on the enhanced income. The learned Departmental Representative, on the other hand, placed reliance on the orders of the lower authorities.
13. We have considered this aspect. It is evident from the findings given by us above that the additions made both on account of share money and bardana purchased has been directed to be deleted and the position being so, the question of allowing any further deduction does not arise. In this view of the matter, the ground raised is rejected as infructuous.
14. We now take up the appeal for the asst. yr. 1986-87 being ITA No. 4504/Ahd/1995. The assessee has raised the following two grounds :
1. The learned CIT(A) erred in confirming the assessment of Rs. 6 lacs that represented the share application money received by the appellant from a large body of applicants consequent to public issue of shares as being its own unaccounted income and income assessable for the asst. yr. 1986-87 by reopening the assessment under s. 148.
2. The learned CIT(A) erred in not giving any ruling in respect of levy of interest under s. 217 inasmuch as the applicant denied its liability to pay interest under s. 217. He ought to have appreciated that at the time of making assessment under s. 143(3) no interest was leviable/levied under s. 217 and hence no interest can now be levied while making reassessment under s. 147. During the course of hearing the assessee raised the following additional ground and further prayed that this being a purely legal ground does not call for any investigation of facts and it also goes to the root of the issue the same be admitted :
“The learned Dy. CIT erred in initiating proceedings under s. 147 by issue of notice under s. 148 without fulfilling the mandatory requirements for issue of notice under s. 148 and, accordingly, any proceedings pursuant to the said invalid notice must collapse at the very threshold, being ineffectual and void.” This being a legal ground is admitted, to which the learned Departmental Representative also made no serious objection.
15. The facts for the current year as emerging from the records are that the CIT(A) while disposing of the appeal for the asst. yr. 1987-88 made an observation that out of the equity share money of Rs. 12 lakhs, Rs. 6 lakhs pertained to the current asst. yr. 1986-87 and the AO was directed to verify the position and to take necessary action. The AO taking cognizance of such observation reopened the assessment for the current assessment year by issue of a notice under s. 148 of 9th Aug., 1991, and the assessee filed a return in response thereto on 16th Sept., 1991. The AO in consequence of the findings given in the asst. yr. 1987-88 made addition of Rs. 6 lakhs in the total income of the current year on account of the share application money. The first appellate authority on appeal confirmed the addition so made.
16. The learned authorised representative of the assessee, so far as the addition made of Rs. 6 lakhs is concerned, advanced similar and identical arguments and submissions as were made in the appeal for asst. yr. 1987-88. The learned authorised representative also made legal submissions challenging the reopening of the assessment for the current year and the same in brief are as under :
(i) That the AO was requested to indicate reasons for issue of notice under s. 148 and precise nature of income which in his opinion has escaped assessment with a further request that the assessee be furnished with such reasons even after filing of the return. The assessee made similar request at all levels but the AO failed to furnish the reasons recorded. He has further submitted that s. 148(2) mandates the AO before issuing any notice to record his reasons for doing so. It is claimed that it is important to ascertain whether the AO recorded the reasons and they have got a nexus with the impugned proceedings under s. 147. According to the learned authorised representative, recording of reasons is mandatory and non-recording of reasons makes the assessment invalid ab initio.
(ii) That the notice issued under s. 148 requires the assessee to file a return within 30 days from the date of its service whereas as per s. 148 the return is to be filed within a period not less than 30 days. In other words, the mandatory notice contemplated by s. 148 was not complied with and accordingly the reassessment proceedings must collapse at the very threshold. In support he has placed reliance on the following decisions :
(a) Tribunal decision in the case of Prabhat Saw Mills & Timber Merchants vs. ITO (1994) 51 ITD 548 (Bang) wherein identical situation was involved and the Tribunal concluded that notice under s. 148 was bad in law and consequently reassessment made was illegal and void and was cancelled.
(b) CIT vs. Ramsukh Motilal (1955) 27 ITR 54 (Bom) wherein notice under s. 34 gave only 6 days to make a return. Such notice issued was held illegal.
(c) Y. Narayan Shetty & Ors. vs. ITO (1959) 35 ITR 388 (SC) wherein it was held that notice under s. 34 of 1922 Act for the purpose of initiating reassessment proceedings was not a mere procedural requirement but the service of the prescribed notice on the assessee by giving statutory period was a condition precedent to the validity of reassessment.
(d) CIT vs. Nanalal Tribhuvandas & Anr. (1975) 100 ITR 734 (Guj) wherein it was held that under s. 34 r/w proviso to s. 22(2) the notice in connection with the reassessment proceedings must call upon the person concerned to file a return within such period not being less than 30 days. Therefore, the notice calling upon the assessee to file return during a shorter period was not in accordance with law. The validity of notice under s. 34 goes to the very basis of jurisdiction of the ITO to entertain reassessment proceedings and in the absence of such notice the ITO has no jurisdiction to initiate reassessment proceedings.
Such defect in the notice under s. 148 cannot be saved by the provisions of s. 292B as provisions of s. 292B cure irregularity and not illegality.
(iii) That the original assessment was completed for the year under s. 143(3). All disclosure required by law was made during the original proceedings. There was no statutory requirement to furnish any information other than share application money which was shown in the balance sheet of the company under the head share capital. Reference was made to the public issue in the audit report. Money was collected through Canara Bank. The assessee thus disclosed all primary facts relating to the public issue at the time of original assessment. The notice issued under s. 148 is beyond the expiry of four years from the year of assessment. There being no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment the proceedings initiated is out of time and the reassessment made was without jurisdiction and void. In support the learned authorised representative has cited certain decisions.
17. On the other hand, the learned Departmental Representative placed reliance on the orders of the lower authorities and has further submitted that in view of the finding given by the CIT(A) in the asst. yr. 1987-88 the AO was fully justified in reopening the assessment earlier completed. In support he also placed reliance on the following decisions :
(i) Motilal Tekchand vs. CIT (1967) 64 ITR 377 (All)
(ii) ITO vs. Mahadev Lal Tulsian (1977) 107 ITR 786 (Cal).
As regards the recording of reasons he could not confirm or deny whether the reasons were recorded before issuing notice under s. 148 requiring the assessee to file the return within a period of 30 days. It is submitted that the relevant section has since been amended by the Finance Bill, 1996, with retrospective effect and the objection in this regard does not hold good. The learned Departmental Representative, therefore, pleaded that reassessment proceedings initiated were valid and the addition made deserves to be confirmed.
18. We have considered the facts, rival submissions and material available on record. While disposing of the appeal for the asst. yr. 1987-88 above we have already given a finding that the public issue raised was genuine and the equity share money received was a capital receipt. The addition made on this count has, therefore, been directed to be deleted for asst. yr. 1987-88. It is mentioned in this regard that the AO had made the addition of Rs. 12 lakhs on account of equity share money in the asst. yr. 1987-88 and the same was sustained by the CIT(A). However, as per the observation made Rs. 6 lakhs out of the total equity share money of Rs. 12 lakhs was sought to be assessed in the current asst. yr. 1986-87 by resort to reassessment proceedings.
The finding thus given for the asst. yr. 1987-88 squarely applies to the addition made of Rs. 6 lakhs in the current asst. yr. 1986-87 on account of share application money. The addition made is, therefore, directed to be deleted.
18.1. Since we have deleted the addition made of Rs. 6 lakhs on facts the legal grounds remain academic. However, before parting we would like to make the following observations on various grounds raised on behalf of the assessee :
(i) It is alleged that the notice given under s. 148 requires the assessee to file the return within 30 days from the date of service of notice whereas requirement of s. 148 is to file return within a period of not less than 30 days and the period allowed being not in conformity with the provisions of s. 148 notice issued is claimed to be invalid. It is mentioned in this regard that s. 148 has since been amended by the Finance Act, 1996, with retrospective effect from 1st April, 1989, by omitting therefrom the words “not being less than 30 days”. With the amendment so made in s. 148 the notice issued under s. 148 requiring filing of return in the prescribed form within such period as specified in the notice is fully in accordance with the provisions of s. 148 and the objection raised in this regard has therefore no merit.
(ii) It is claimed on behalf of the assessee that as per sub-s. (2) of s. 148 the AO before issuing notice was required to record reasons for doing so. The recording of reasons is mandatory before initiation of reassessment proceedings. The assessee at the level of the AO as well as CIT(A) demanded reasons recorded but to no avail. The learned authorised representative of the assessee also made a similar request before us requiring the Departmental Representative to furnish copy of the reasons recorded. The Bench required the Departmental Representative to show whether the AO recorded the reasons before initiation of reassessment proceedings and if so, to furnish a copy thereof for the satisfaction of the Bench. The learned Departmental Representative also failed to do so and informed that necessary cover containing the reasons recorded, if any, is not available. We also note from the opening para of the assessment order that the AO while bringing out the charge about the proposed addition of Rs. 6 lakhs made no mention about the reasons recorded, if any, about the escapement of income. Under the circumstances, we infer and assume that no reasons were recorded as per mandatory requirement of sub-s. (2) of s. 148 by the AO before issue of notice under s. 148 and since condition precedent to issue of notice under s. 148 is not fulfilled the notice under s. 148 is invalid ab initio and the reassessment made based on such notice deserves to be cancelled.
(iii) As regards the third objection we note that the notice under s. 148 was issued on 9th Aug., 1991, for the current asst. yr. 1986-87. As per proviso to s. 147 where an assessment under s. 143(3) or 147 had been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment for such assessment year by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for that assessment year. Four years from the end of asst. yr. 1986-87 expired on 31st March, 1991, whereas the notice under s. 148 was issued on 9th Aug., 1991. The notice issued was, therefore, beyond the period of 4 years from the end of the assessment year. We further note that in the audited accounts filed along with the return for the asst. yr. 1986-87, the assessee in the balance sheet had shown the share application money at Rs. 6,90,250. In the directors report forming part of the audit report share capital was reported as under :
– “SHARE CAPITAL
During the year under review, 79,700 equity shares of Rs. 10 each reserved for firm allotment to the employees, directors, business associates, etc. were fully subscribed for and allotted accordingly. The Directors had offered to the public for subscription the remaining 1,20,000 equity shares of Rs. 10 each through a prospectus. We are pleased to inform you that the issue is fully subscribed.” It would thus be seen that necessary facts as per requirement of the Companies Act were disclosed in the audit report filed along with the original return of income and the assessee was not under any obligation to disclose anything over and above that. There was, therefore, no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment and accordingly, no action under s. 147 could be taken by issue of a notice under s. 148 beyond a period of four years from the end of the assessment year. Notice under s. 148 was admittedly issued beyond a period of 4 years from the end of the assessment year and the same was, therefore, invalid and reassessment made based on such notice does not deserve to survive.
18.2. Considering all the facts and circumstances discussed above, we are of the opinion that neither the reassessment proceedings initiated under s. 148 is valid nor the addition made of Rs. 6 lakhs is justified. The reassessment made is, therefore, directed to be cancelled.
19. The next ground raised is against levy of interest under s. 217. Since the reassessment made is cancelled this ground of the assessee does not survive being infructuous and the same is rejected.
20. In the result, both the appeals of the assessee for the asst. yrs. 1986-87 and 1987-88 are allowed.