ORDER
Vimal Gandhi, Judicial Member
1. This appeal by the assessee for the assessment year 1987-88 is directed against the order of Commissioner of Income-tax (Appeals)-II, New Delhi dated 19th September, 1991. The main ground of appeal relates to the addition of Rs. 10,000 on account of unproved share subscription. The assessee has further challenged disallowance of lease rent (Rs. 1,53,767), interest (Rs. 16,880), staff welfare expenses (Rs. 16,655), depreciation on carbonising plant (Rs. 55,000) and addition from undisclosed sources (Rs. 86,050). The main ground of appeal is directed against the following observations of the learned CIT (A):
The next ground of appeal relates to addition of Rs. 10 lacs representing subscription to preference share which is held as income from undisclosed sources by the officer. The officer has discussed in detail the reason for making the addition from page 2 to page 7 of the assessment order. The officer has made the addition on the ground that the assessee has failed to produce the parties, the identity of the parties have not been proved the capacity of the parties to invest the money has not been proved. He has also held that the parties in whose name the shares were allotted have transferred them within a few weeks to Shri J.K. Rishi and Smt. Nirmal Rishi and the members of their family. He has observed that the directors had purchased these shares within a few weeks of the allotment. None of the parties except Shri Brijlal was produced before the officer.
22. Though the addition of Rs. 10 lacs has been objected in the ground of appeals on the ground that sufficient opportunity has not been given, at the time of hearing of the appeal no argument was advanced. In the written submission made by the appellant’s representative he merely stated that further opportunity should be granted for filing the confirmation letters.
23. A perusal of the record shows that the case had been taken up for hearing in 1989 and a no. of opportunities had been given to the assessee and the assessment order was passed only in December 1990 and a no. of questionnaire had been issued to the appellant. Therefore, the appellant’s plea that sufficient opportunity has not been given to him cannot be accepted. The appeal had also been fixed for hearing on 15-3-1991, 21-3-1991, 22-4-1991, 6-5-1991, 28-5-1991, 22-8-1991, 10-9-1991 and 17-9-1991. Therefore, no. of opportunities had already been granted to the appellant to produce any evidence to which he relied. In spite of this no details or papers have been filed in support of his contention that the addition in respect of share contribution is unjustified. On the other hand, the officer has given complete details and the basis on which he has arrived at the conclusion that the parties in whose name the preference shares have been allotted are all bogus and how he has arrived at the conclusion that the money belongs to the appellant company and therefore has treated as income from undisclosed sources. Therefore, the officer’s action in adding the amount as assessee’s income from undisclosed source is confirmed.
2. The uncontroverted facts placed on record are that assessee as a private limited company was incorporated in the year 1976 and commenced its business of manufacture and sale of electronic goods like VCR, audio, video cassettes, etc., in the year 1978. The assessee-company had authorised share capital of Rs. 50 lakhs. Till the close of previous year relevant to last assessment year, i.e., till 30th June, 1985, it had subscribed capital of Rs. 40 lakhs. The said subscribed capital in the name of different shareholders was accepted and there is no dispute about the same. In the period under consideration, the assessee issued for subscription 10,000 preferential shares of Rs. 100 each, of aggregate value of Rs. 10 lakhs. These shares were fully subscribed. The names of parties purchasing the shares with the amount subscribed are reproduced in para 12 of the assessment order. However, before the end of the previous year, the above preferential shares were sold and transferred to Shri J.K. Rishi, Smt. Nirmal Rishi and members of their family who were existing shareholders and had substantial interest in the assessee-company.
3. The Assessing Officer called upon the assessee to prove genuineness of share subscription of Rs. 10 lakhs as per order sheet entry dated 16th March, 1990. The shareholders were required to be produced at any time up to 28th March, 1990. The list of 20 parties with addresses requesting the Assessing Officer to issue summons to these parties was filed. Only one subscriber namely Shri Brijlal appeared before A.O. and his statement was recorded on 23rd March, 1990. The others, according to the Assessing Officer, did not appear. In fact, the summon sent to them returned undelivered by postal authorities. The Assessing Officer accordingly summoned Shri J.K. Rishi, the Director of the company had signed the return under Section 131 of the Income-tax Act for some-date in December 1990. On 14th December, 1990, CA appeared on behalf of the assessee and asked for adjournment. This request was refused and a penalty of Rs. 1,100 was imposed upon Shri J.K. Rishi under Section 272A(1) of I.T. Act. The ITO completed the assessment on 21st December, 1990 adding Rs. 10 lakhs as assessee’s income from undisclosed sources with the following observations:
13. The above 10,000 preference shares were allotted on three dates: 3,350 shares on 3-9-85, 2,650 shares on 19-11-1985 and 4,000 shares on 16-1-1986 respectively to those parties; whose capacity to purchase is non-existent and identity has not been proved. Interestingly these shares within a few weeks were sold and held by Sh. J.K. Rishi, Smt. Nirmal Rishi & J.K. Rishi and the members of their family. In fact, some of these parties are used again and again to apply for equity/preference shares and after a few weeks/months the directors had purchased these shares. These parties except Sh. Brijlal have never been produced before the income-tax authorities.
14. In view of the above, it is clear as under:
(a) The assessee failed to produce the parties.
(b) The identity of the parties have not been proved.
(c) The capacity of the parties to invest Rs. 50,000 has not been proved.
(d) The assessee did not discharge the onus cast upon it and the explanation in form of assertion is unsatisfactory.
(e) The parties are not stock exchange bulls. There was no incentives for them to invest as the company is not a blue-chip company. These parties have never invested in any other company. The parties are men of straw. They have sold the shares immediately after allotment.
(f) Thus Rs. 10,00,000 is taken as income of the assessee from undisclosed sources.
4. Shri C.S. Aggarwal, learned counsel for assessee submitted that the shareholder to whom 10,000 preference shares were allotted in the period under consideration transferred the shares to the existing shareholders whose identity was not in dispute. These shares were transferred in accordance with the Companies Act and said transfer was accepted by Registrar of the Companies. He brought to our notice intimation sent to the above authority which according to him was conclusive proof of share allotted. Shri Aggarwal further submitted that out of twenty persons.eighteen persons were such who held share earlier to 30th June, 1985 and their subscription and holding was not in dispute. Thus, even in earlier period, identity of these 18 persons was accepted. There was no justification to challenge the existence of these persons in the period under consideration. Shri Aggarwal further submitted that Shri Brijlal in his statement on oath duly confirmed purchase of shares and his identity was not in doubt. As per ratio of Full Bench decision of Delhi High Court in the case of CIT v. Sophia Finance Ltd. [1994] 205 ITR 98, the learned A.O. was not justified in calling upon the assessee to prove creditworthiness of such share subscribers. Shri Aggarwal also brought to our notice decision dated 5th March, 1992 of Honourable Delhi High Court in the case of CIT v. Kwick Travels [IT Case No. 168 of 1991] wherein their Lordships rejected reference application of the revenue under Section 256(2) of the Income-tax Act challenging finding of the Tribunal that under Section 68 of Income-tax Act, assessee cannot be called upon to prove creditworthiness of persons making investment as share capital. The gist of the decision is reproduced in 199 ITR page 85 (Statute). Shri Aggarwal further submitted that Full Bench decision of Honourable Delhi High Court was not on merit but had only directed that a question of law under Section 256(2) should be referred to the Honourable High Court. Shri Aggarwal relied upon certain decision of other Tribunals made part of the paper book. In particular he relied upon the decision reported in 24 ITD page 540 (sic) and in Sushila Forging (P.) Ltd. v. Dy. CIT [1993] 46 TTJ (Delhi) 66. He submitted that complete addresses of subscribers were furnished to the A.O. and in two cases those subscribers had asked for further time to make statements. The said request was not entertained nor any reference to above facts was made in the assessment order. Thus, when identity of parties or subscribers was proved, no addition on account of unproved share subscription could be sustained. In the alternative, Shri Aggarwal submitted that the assessee would produce all share subscribers before the A.O. for exami-nation in case the matter is remitted back to the file of the Assessing Officer.
5. Shri Haldhar, learned Departmental Representative opposed the above submissions of Shri Aggarwal. He argued that in this case, preferential shares were issued much after the commencement of business. It was issued by a private limited company. The assessee was given several opportunities by the A.O. to prove the share subscription. The assessee was unable to establish the identity of these subscribers. The addresses furnished were incomplete and no satisfactory proof regarding genuineness of subscription was placed before the A.O. In the above circumstances, provision of Section 68 were rightly invoked by the A.O. and the amount in question was treated as assessee’s income from undisclosed sources. According to Shri Haldhar, the present addition satisfied all the tests of Full Bench decision in the case of Sophia Finance Ltd. (supra). He argued that no material was placed before the assessee to establish that share subscription money was paid.
The other facts like transfer of shares to Shri J.K. Rishi and his family clearly showed that it was only a made up affair. The shareholders were benami and fictitious having no existence. The circumstantial evidence available on record lead to only one conclusion that the share subscription money actually belonged to the company. Shri Haldhar accordingly supported the impugned order of CIT (A).
6. We have given careful thought to the rival submissions of the parties. The question whether provisions of Section 68 were applicable to share subscription in the hands of a company was a subject-matter of great controversy. In the case of CIT v. Stellar Investment Ltd. [1991] 192 ITR 287 (Delhi), the jurisdictional High Court made certain observation in favour of assessee and held that even if the subscribers to the capital were not genuine:
under no circumstance could the amount of share capital be regarded as undisclosed income of the company.
The aforesaid decision of Stellar Investment Ltd. (supra) particularly with reference to the aforementioned observations was overruled by Full Bench decision of Honourable Delhi High Court in the case of Sophia Finance Ltd. (supra). The aforesaid decision no doubt is with reference to the application under Section 256(2) of the Act but their Lordships made certain observations which are relevant and are reproduced below:
If the amount credited is a capital receipt then it cannot be taxed but it is for the Income-tax Officer to be satisfied that the true nature of the receipt is that of capital. Merely because the company chooses to show the receipt of the money as capital, it does not preclude the Income-tax Officer from going into the question whether this is actually so. Section 68 would clearly empower him to do so. Where, therefore, the assessee represents that it has issued share on the receipt of share application money than the amount so received would be credited in the books of account of the company. The Income-tax Officer would be entitled to enquire 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, in fact, 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’ 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 the income of the assessee.
Their Lordships further observed as under:
We make it clear that we are not deciding, nor is it our intention to decide as to on whom and to what extent the onus to show that an amount credited in the books of account is share capital and when does that onus stand discharged. This will depend on the facts of each case.
The observations made by their Lordships have to be taken into account while considering application of Section 68 to the share capital in the hands of the assessee-company. The decision unfortunately was not available to the learned revenue authorities when the matter was decided by them.
7. In the case in hand, the Assessing Officer right from the beginning asked the assessee:
to produce all shareholders and prove of their identity, bank account, financial status, income-tax records, passbook, etc.
It appears that in the letter of assessee dated 28-8-1990, there was some reference to confirmations from the shareholders. About these confirmations, the Assessing Officer had made the following remarks at the end of para 9 of his order:
confirmations referred to in assessee’s letter dated 28-8-1990 were not submitted presumably as bank accounts and assessment orders were being collected at that stage.
The Assessing Officer then referred to the fact that shareholders were not produced. The request made by CA of the assessee on 14th December, 1990 to grant further time to the assessee was declined and the assessment made on 21 st December, 1990 for the reasons already produced. The share subscription was treated as assessee’s income from undisclosed sources.
8. It is clear from the assessment order that heavy duty was cast upon the assessee not only to produce shareholders but also their financial status, bank pass-books and assessment record. This onerous duty admittedly made the assessee not to file whatever evidence was available with the assessee. In our considered opinion, it may not be fair and reasonable to call the company to produce all the above referred to evidences in case of share subscription. All that is required from the assessee as per the decision of Full Bench is to prove that it had issued share on receipt of share application money. Then the amount received would be credited in the accounts of the company as the capital receipt. However, the existence of shareholders is essential. The Full Bench observed:
If the shareholders exist, then, possibly, no further enquiry need be made.
The Income-tax Officer in the present case clearly applied more onerous test that what is laid down by the Full Bench while making enquiry under Section 68 of the I.T. Act.
9. It is an admitted position that Shri Brijlal one of the shareholders appeared before the Assessing Officer in response to summons and his statement on oath was recorded. He confirmed the transaction of purchase and sale of shares but the said statement has been rejected without much discussion and on the ground that his reply were evasive on material points. At the time of hearing of appeal, Shri C.S. Aggarwal, learned representative of assessee filed before us copies of two letters dated 24th March, 1990 addressed to the Assessing Officer by Shri Ashok Kumar and Nandlal requesting the A.O to grant more time to these shareholders. It is not known why no reference to these letters was made by the Assessing Officer in the assessment order. These letters assume significance as with reference to the summons sent to the shareholders through postal authorities, the Assessing Officer has observed as under:
Summons issued through Regd. Post to S/Sh. Sunder Lal, Gulshan Kumar, Chiranjee Lal, Nand Lai, Bhimsen, Krishan Chand, Bhagwan Dass, Balram Singh, Ashok Kumar, Sudesh Kumari, Kailash Kumari who have been refused by the postal authorities with remarks that address is not complete.
The words “refused by postal authorities” are significant as normally parties refused to take letters and not postal authorities for want of complete address. It is not suggested by the revenue that the Assessing Officer asked the assessee to furnish complete and proper address so that parties may be summoned by the Assessing Officer. The duty cast upon the assessee was not only to produce shareholders but also other documents to which we have referred to earlier. The assessee did raise a ground of appeal before CIT(A) that sufficient opportunity was not allowed to him and time be granted to him for filing confirmation letter. This plea was summarily rejected as no arguments were advanced. The net result of the above approach of revenue authorities is that we are unable to record whether shareholders in the present case exist or do not exist to determine whether there was, “valid issuance of share capital”, the test laid down by the Full Bench. On the above material, we are further unable to decide whether onus was properly placed and the same can be taken to be discharged. The option with us is to accept offer made on behalf of the assessee to produce all the shareholders for examination before the Assessing Officer. The assessee cannot be called upon to produce bank record, financial status and income-tax record of the shareholders. The A.O. may collect any evidence for purpose of application of Section 68. Needless to add that in case shareholders are not produced the A.O. would be entitled to draw adverse inference as warranted by facts and circumstances of the case. The A.O. is to redecide the matter objectively in accordance with the test laid down by Full Bench of Honourable High Court of Delhi. He is also at liberty to take into account any other decision relevant to the controversy. The assessee should also be provided reasonable opportunity of being heard. With the aforesaid observations we set aside impugned orders on this addition and restore the matter to the file of the Assessing Officer.
10. The other grounds raised in this appeal are also allowed for statistical purposes. The disallowance/addition challenged before us would be reconsidered by the Assessing Officer in the light of objections raised by the assessee. Both the parties agreed to remand on these grounds. The impugned order is set aside.
11. In the result, the assessee’s appeal is allowed for statistical purposes.