ORDER
D.K. Seth, J.
1. In this reference, three questions have since been referred to viz. :
“1. Whether the findings of the Tribunal leading to the conclusion that the entire share capital of the assessee-company was genuine are based on relevant material or otherwise perverse ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the entire addition made on account of income from undisclosed sources ?
3. Whether the findings of the Tribunal leading to the conclusion that the share loss has been established by the assessee-company to be genuine is based on relevant evidence or otherwise perverse ?”
2. From the above questions, it appears that there are two parts in this case. One part relates to the subscription to share capital and the other part relates to loss in share transaction. So far the capital part is concerned, the same can be divided into two parts. One in respect of promoters’ quota and the other in respect of public issue.
Loss of share : Question No. 3
3. We may deal with the loss in share transaction first. The grounds disallowing share loss by the AO affirmed by the CIT(A) were those that out of the four blocks of shares delivery of three blocks were received after five months and the price was also paid after five months, but were immediately sold at a loss. The other grounds were that the share broker only in respect of one group was produced but the other share brokers did not appear despite notice. The books of accounts of the share broker, who appeared, also show some discrepancies in the entries made. On these grounds this transaction was held to be ingenuine. Whereas the Tribunal had found that all relevant documents relating to contract notes, bills, the quoted price and other materials were produced. The transactions were made through cheques. All the shares related to the reputed companies and were quoted shares in the stock exchanges and were purchased and sold at the prevalent quoted market rates, which was verified from the statement of the stock exchanges. On these basis, the learned Tribunal found that the CIT(A) had proceeded on the basis of suspicion that there might be some ingenuinity in the transactions. On the basis of the materials produced, the learned Tribunal came to a finding of fact, which in our view does not seem to be perverse. Whether the share could be sold immediately on the date of purchase or not was a question of business expedience. Whether the decision was correct or wrong cannot be a question, which can be a subject-matter of decision in such a case. In order to find out whether the transaction is genuine or ingenuine, it is neither the expedience or correctness of the decision nor the business expertise of the person to be considered. It is to be considered on the basis of the materials that there was no such transaction and that these share transactions were paper transactions. The suffering of loss could not be a factor for such purpose.
4. Mr. Khaitan had relied on the decisions in CIT v. Emerald Commercial Ltd. and Anr. where a Division Bench of this Court has held that non-production of share broker by the assessee did not disentitle the assessee from claiming loss in genuine transaction of shares. In this case the learned Tribunal having come to a finding on the basis of the materials that the transaction was genuine, sitting in reference, unless it is found perverse, this Court cannot intervene. In the said decision, it was further found that the findings of the ITO and the CIT(A) were based on presumption and not warranted by facts of the case as in the present case. Mr. Khaitan then relied on the decision in CIT v. Dhawan Investment & Trading Co. Ltd. . In the said case the shares were transacted through noted share brokers at the rates quoted in the stock exchange. The claim of the assessee was accepted. Such, an acceptance was found favour by this Court in the said decision. Mr. Khaitan had then relied on the decision in CIT v. Currency Investment Co. Ltd. . In this case, it was held that merely because the assessee could not produce the broker through whom the shares were sold, the same did not affect the genuineness of the transaction when the assessee disclosed the identity of persons from whom the shares were purchased and to whom sold. Even when two views are possible, if the view taken by the learned Tribunal is possible, it cannot be said to be perverse.
5. Having regard to the proposition of law as discussed above and the facts and circumstances of the case, we find that in the present case, the view taken by the learned Tribunal cannot be said to be erroneous or perverse. Therefore, we answer the question No. 3 in the negative in favour of the assessee.
Section 68 : The principle : Respective contentions
6. Mr. Khaitan had relied on the decision in CIT v. Orissa Corporation (P) Ltd. to support his contention where it was held that there was no effort made to pursue the so-called alleged creditors and that after the materials were produced by the assessee, they could not do anything further. Therefore, it was incumbent on the Revenue to scrutinize and find out the real nature of the transaction. It cannot proceed on the basis of surmises and conjecture. He had also relied on the decision in Bharati (P) Ltd. v. CIT . In this case, it was held that mere filing of confirmatory letters would not discharge the onus that lay on the assessee unless the identity of the creditors is established. Here, according to him, the identity of the creditors was established in respect of 67 per cent of the public issue as well as the directors’ quota and, therefore, relying on this decision, he contends that the assessee had nothing, which it could do further. He then relied on the decision in CIT v. W.J. Walker & Co. . In this case, it was held that after the assessee has proved positively that the failure to return correct income did not arise from any fraud, gross or wilful neglect on his part, the Department was bound to prove that the assessee was guilty of concealment of income or had furnished inaccurate particulars relying on CIT v. Anwar Ali . But this decision does not help Mr. Khaitan in view of the fact that it relates to a
proceeding under Section 271(1)(c). The principle of mens rea laid down in Anwar Ali’s case is not more a good law by reason of subsequent decision in Addl. CIT v. Jeevan Lal Sah and as such we may not gain any benefit out of the said decision. Mr. Khaitan had next relied on the decision of c. In this case, it was held that enquiries were conducted and it was found that either the files did not exist or the records did not tally with the facts mentioned by the assessee, Apart from having enquiries made, several letters were issued to the assessee bringing to its notice that the loans could not be verified and adequate proof was required, But the assessee did not respond. In such circumstances, the assessee’s case was disbelieved. Relying on the principle, he contends that without giving sufficient opportunity when the subscribers have not responded the AO could not jump to a conclusion that the transaction was ingenuine. Mr. Khaitan then relied on CIT v. Korlay Trading Co. Ltd. . In this decision, it was held that once the assessee had discharged its initial burden, no investigation or proper steps had been taken by the ITO to bring on record the materials to controvert the claim of the assessee. The claim of the assessee could not be denied merely because the broker through whom the transaction was effected had failed to produce his books. The creditor should be identified, their creditworthiness should also be established and the genuineness should be proved. In this case the identity had admittedly been established but for establishing the creditworthiness, no further steps were taken by the IT authority nor proper opportunity was given to the assessee. Mr. Khaitan then relied on KM. Sadhukhan & Sons (P) Ltd. v. CIT . Relying on the decision, he contended that reliance placed on this decision by Mr. Agarwal does not help Mr. Agarwal in view of the distinguishing facts of the case. Mr. Agarwal had relied on CIT v. Precision Finance (P) Ltd. (supra), which was distinguished by Mr. Khaitan as discussed hereinbefore. Mr. Agarwal had also relied on the decision in CIT v. Ashwani Kumar Liladhar , Mr. Khaitan had distinguished the same on the ground that there the assessee itself had not taken steps but here it is not a case and on facts, this decision does not apply.
Share capital: Public issue
7. So far as the part of the share capital is concerned, we may first deal with the part related to the public issue. In this case, it appears that notices under Section 133(6) of the IT Act, 1961, were issued. About 82 subscribers holding 44,000 shares were selected out of the total number of subscribers of public issue. Out of these subscribers, 24 had responded. These 24 subscribers represented 29,500 shares, which were accepted to be genuine. Ten persons representing 2,300 shares could not be served. About 48 persons, though served, did not respond. The AO calculated this figure of persons responding at 40 per cent. But the Tribunal had rightly held the same to be 70 per cent. Since 29,500 shares represented 67 per cent of 44,000 shares, which can be rounded off to 70 per cent. But then the balance 30 per cent which was disbelieved by the CIT(A) has been held to be genuine transaction by the learned Tribunal.
8. Mr. Agarwal had pointed out that these 48 shareholders did not respond till the assessment was made and this information was communicated to the assessee. We find that it so appears from p. 29 of the paper book. It further appears that the assessee did not take any steps either to obtain confirmatory letters from these non-responding subscribers nor had attempted to produce the subscribers nor any to disclose the income-tax file numbers of these subscribers. Neither he had ever applied for issuing any notice/summons under Section 131 nor took any other steps to prove the same. The burden, which was initially discharged by the assessee shifted on the Revenue. This stood discharged by the Revenue after the enquiry was made through issuing notice under Section 133(6). When this was so communicated to the assessee, it was incumbent on the assessee to take appropriate steps to substantiate the creditworthiness of the subscribers and prove the genuineness of the transactions. But, it had not done so.
9. In this case, notices under Section 133(6) were issued to the subscribers who were outside the state. Notice upon 10 shareholders could not be served. The balance 48 did not respond. These facts were communicated to the assessee by the AO. The AO could do no further. There was no other material on the basis of which it could have enquired into the matter. Neither the income-tax file number was available to cross-check, nor there was any prayer on the part of the assessee to issue summons under Section 131 of the Act. Therefore, the AO did nothing further. It is an admitted proposition that the burden lies on the assessee. After this was communicated to the assessee that these persons were not responding, it was the responsibility of the assessee to prove the creditworthiness of the subscribers or the genuineness of the transactions, but it had done nothing. Therefore, the finding of the learned Tribunal with regard to the public issue in respect of these 30 per cent subscribers seems to be perverse. Therefore, we are unable to accept the learned Tribunal’s finding with regard to the public issue. We affirm the decision of the CIT(A) with regard thereto.
Share capital: Promoters’ quota
10. So far as the promoters’ quota is concerned, it appears that the AO had accepted that subscription by 30 shareholders to the extent of Rs. 3,13,000 as genuine but disbelieved those of nine at p. 70 of the paper book. Whereas CIT(A) had accepted contribution of 5 shareholders in serial Nos. 4, 6, 7, 8 and 9 at p. 70 of the paper book representing Rs. 1,88,000. He had, however, sustained addition with regard to the contribution of 4 shareholders in serial Nos. 1, 2, 3 and 5 representing Rs. 1,25,000. Whereas the learned Tribunal had accepted the entire subscription and had disallowed the addition in respect of those four shareholders in serial Nos. 1, 2, 3 and 5. Upon examination of this situation as it emerges from the order of the learned Tribunal at p. 70, it appears that the nine promoters the subscription whereof has been held to be genuine have been reproduced in the following manner:
Sl.
Name
of shareholders No.
No.
of shares
Remarks
1.
Bimal Kumar Ghosh
2,500
Summon issued under s. 131.
shareholder could not produce books of accounts. Investment not verifiable
from assessment records.
2.
Dilip Kumar Biswas
2,500
Shareholder dead. Summon
could not be served, purchase not verifiable from assessment records.
3.
R.C. Nandy
5,000
-do-
4.
Padam Ghandra Pugalia
2,500
No investment shown in
the file as per inspector’s report.
5.
Mohan Lal Golecha
2,500
No such file in the blue
book of the ward.
6.
Sitaram Khaitan
5,000
-do-
7.
Shantilal Jain
2,500
No such file in the Blue
book of ward.
8.
Chand Ratan Mohta
4,500
-do-
9.
Inderchand Daga
4,300
Summpns under s. 131
could not be served; company also failed to produce the shareholder.
11. The AO had disbelieved the genuineness of the subscription of the above 9 persons on account of the reasons stated against each of the 9 subscribers. The CIT(A) had accepted the genuineness of the transaction in respect of 5 of them at serial Nos. 4, 6, 7, 8 and 9 on the ground that these shareholders had sent their confirmations (p. 55, PB). The CIT(A) did not accept the genuineness of the subscription of serial Nos. 1, 2, 3 and 5 (p. 54, PB) on the ground that they did not send confirmations. Whereas the learned Tribunal had accepted the subscription of the respondent No. 1 since the subscription was received through bank. He had accepted the subscription of the subscribers at serial Nos. 2 and 3, who were dead, on the same ground. He also accepted that of serial No. 4 on the ground that if the investment could not be shown in their file, the same could be assessed at the hands of the subscribers not at the hands of the assessee, which was also the view taken by the CIT(A). The main ground on which the learned Tribunal accepted the genuineness is that none of the shareholders had denied to have made the subscription (p. 78, PB). He also found that non-verification to establish the identity of shareholders and genuineness of the subscription does not mean that the addition should be made because of making addition only. He proceeded on the footing of the human probability test leading to calculate general truth from the bank of shareholders from which nothing comes forward to deny the contribution, Therefore, the same should be accepted as genuine.
12. We can well accept the case of the persons in serial Nos. 2 and 3, who were dead on account whereof nothing could be verified. In the absence of any finding that these two persons were dead before subscribing their contribution, the subscription cannot be held to be ingenuine. So far as the subscriber in serial No. 1 is concerned, he was identified but he could not produce the books of accounts and the investment could not be verified from the assessment records. Subscription of serial No. 4 was not shown in the file of the subscriber. Even if the identity is established, the creditworthiness is required to be proved. Once the creditworthiness is established, the genuineness of the transaction is required to be proved. The creditworthiness of the subscriber and genuineness of the transaction are complementary to each other. Establishment of identity is not sufficient even if the subscriber confirms the subscription. Therefore, without proper verification, creditworthiness could not be proved and unless it is proved, the genuineness of the transaction cannot be proved. Therefore, the finding of both the CIT(A) and the learned Tribunal appears to be perverse.
13. The concept of assessment at the hands of the subscriber when the subscription cannot be verified from their accounts after the subscription is confirmed by the subscriber is no more a good law. Under Section 68, the ITO is empowered to lift the veil of corporate identity and find out as to whether apparent is real. It is the assessee on whom the onus lies. Unless sufficient materials are produced, the onus does not shift on the Revenue. But once the materials are scrutinized and the result of the scrutiny is communicated to the assessee, the onus shifts from the Revenue to the assessee. Then the assessee has to take appropriate steps for proving its case. Unless there are sufficient materials after such communication, produced by the assessee, the ITO can do no further.
14. So far as the subscribers in serial Nos. 5, 6, 7 and 8 are concerned, the file numbers disclosed could not be found in the blue book of the ward. Therefore, the material having been found insufficient, the onus shifted from the Revenue to the assessee when it was so communicated, as is apparent from the assessment order (pp. 25-26, PB), which is not in dispute. In the absence of any further materials furnished by the assessee, it is not possible to establish the identity of these subscribers or their creditworthiness. The Revenue could do no further except communicating the same to the assessee. It was incumbent on the assessee to establish the identity and prove the creditworthiness of the subscribers. Unless these are discharged, there is no scope for ascertaining the genuineness of the transaction. Therefore, the creditworthiness with regard to these four subscribers (serial Nos. 5, 6, 7, 8) having not been established, the finding of the CIT(A) and the learned Tribunal appears to be perverse. The subscriber in serial No. 9 could not be served. Neither this subscriber was produced by the assessee. Therefore, the identity was not established. Therefore, his case also cannot be accepted. Thus, the finding of the learned Tribunal as well as that of CIT(A), with regard thereto appears to be perverse.
15. So far as the 9 shareholders in promoters’ quota are concerned, we have accepted the subscription of serial Nos. 2 and 3 who were dead. The appellate authority had proceeded on the basis that summons under Section 131 was served and confirmation was given by these persons but the AO does not mention that these persons, namely, those in serial Nos. 4, 6, 7, 8 and 9 had sent their confirmatory letters. There seems to be unexplained discrepancy. This is also not clarified in the order by the learned Tribunal. In the circumstances, we feel it necessary to remit the cases so far as these persons in serial Nos. 1, 4, 5, 6, 7, 8 and 9 to the learned Tribunal for taking a decision afresh in the light of the observations made in this judgment.
Taking of steps by assessee after communication
16. Another point insisted by Mr. Khaitan, was that in such a case the assessee was not responsible to prove the creditworthiness or genuineness of the transaction in respect of subscription of share capital. He contends that since he had all along maintained the said stand, he did not attempt to prove further apart from producing the materials, which was investigated upon under Section 133(6) by the AO. Such stand was upheld by the Tribunal. Therefore, it cannot be said that the assessee did not take any steps after he was intimated about the situation by the AO. Since he was relying on a particular principle of law having regard to a decision cited by him, namely, Stander Cylinder (P) Ltd. Appeal No. 3024/Del/86 and Kalyani Investment Co. (P) Ltd. Appeal No. 921 (Cal)/70-71, therefore, it was on such understanding that he did not take steps so as not to prejudice his case pending before the Tribunal. It seems that there was sufficient substance in the submission of Mr. Khaitan to the extent about the belief with regard to particular proposition of law.
17. We had occasion to deal with this question in the case of Hindusthan Tea Trading Co. Ltd. v. CIT (IT Ref. No. 20 of 1996, disposed of on 11/12th March, 2003) and in the case of CIT v. Ruby Traders & Exporters Ltd. (IT Ref. No. 78 of 1995, disposed of on 12th March, 2003) where we had negatived the contention that such amount is to be added at the hands of the subscriber or that the assessee has no responsibility to produce any proof. Therefore, having regard to the situation that the assessee had proceeded on a particular belief, he cannot be deprived of an opportunity because of his understanding of the law, which could be so understood having regard to the decision cited by Mr. Khaitan, which now we are holding otherwise, Therefore, in our view, opportunity may be given to the assessee to establish his case with regard to the creditworthiness of the subscribers and the genuineness of the transaction.
18. In the circumstances, this appeal succeeds in part only in respect of 30 per
cent of the public issue and serial Nos. 1 and 4 to 9 in respect of the promoters’
quota of the share capital. With regard to the finding in respect of question
Nos. 1 and 2, the same are modified only to the extent in relation to the 30 per
cent public issue quota and serial Nos. 1 and 4 to 9 in respect of promoters’
quota is perverse and the learned Tribunal was not justified in deleting the
addition in respect of this 30 per cent of public issue and serial Nos. 1 and 4 to
9 in respect of promoters’ quota only.
19. We, therefore, set aside the order of the learned Tribunal to the extent of 30 per cent public issue and affirm the order of the CIT(A) with regard thereto. We also set aside the order of the learned Tribunal only in respect of serial, Nos. 1 and 4 to 9 relating to promoters’ quota and remand the case to the learned Tribunal for deciding the same afresh after giving opportunity to the assessee to establish the creditworthiness of the said subscribers and genuineness of the said transactions or the identity of the said shareholders as the case may be. In order to ascertain the same, the learned Tribunal shall remit the matter to the AO for giving opportunity to the assessee to prove its case and record the evidence as well as his findings and return the same within 3 (three) months to the learned Tribunal and on the basis whereof the learned Tribunal will decide the case afresh within 6 (six) months from communication in accordance with law in the light of the observation made above having regard to the view we have taken in the decision in Hindusthan Tea Trading Co. Ltd. (supra) and Ruby Traders & Exporters Ltd. (supra).
With this observation, this reference is disposed of.
R.N. Sinha, J.
I agree.
By THE COURT 9th April, 2003
20. This order was dictated on 20th March, 2003, but on account of communication gap and want of information and oversight of materials, the matter was directed to be listed as “To be Mentioned”. We had identified the area of which we wanted them to address the Court. Learned counsel appearing for the respective parties have addressed the Court on those points. We have heard the same and accordingly we modify the order dt. 20th March, 2003, and correct the order accordingly. The order shall be deemed to have been passed today. (9th April, 2003)