ORDER–Assessment after considering material on record.
Ratio:
Assessment order of an investment company could not be said erroneous on the ground that sources of investment by shareholders were not verified when it is made after considering all material on record and after making all possible enquiries.
Facts:
The Commissioner was correct that in this case prima facie enquiry is called for. It is an admitted position that a large number of investment and finance companies are floated with considerable amount of share capital and the purpose of floating these companies was only to bring into open the unaccounted income. The Department was a little late in being alive to these developments. But having found that investment companies are used as tools for laundering black money, it is very necessary for every Income Tax Officer coming across a return filed by an investment company to enquire into the share capital. The Income Tax Officer has made the enquiry which he could do under the circumstances. Along with the return filed by the assessee a larger number of enclosures were sent. This contained the list of shareholders holding more than 1,000 shares. The name of the applicant for shares along with the application forms themselves were given to the Income Tax Officer. These forms contained the full address of the party, photostat copies of allotment letters had also been furnished. Share issue expenses’ details were also placed before the Income Tax Officer. Now, when an Income Tax Officer makes an enquiry into the affairs of an investment company there are certain restrictions to the extent of his enquiries from the company. The company knows who are the shareholders and how much they had contributed. This information the Income Tax Officer must extract from the company. However, the company will not know and cannot know the sources of funds for the shareholders. Thus, further probe of the company will be fruitless because the company cannot give any further introduction. This is the limit to which an enquiry could be made in the company’s case in the circumstances like this. We must keep in mind that this company was incorporate only on 27-4-1983. They closed the accounts for the first on 30-6-1984. It was the first year. The share capital had been received in the first part of this year. Even if the company was not able to satisfy the Income Tax Officer the sources from which the shareholders have subscribed to the capital, no assessment can be done in the hands of the company because it is an impossibility for a company which has just then been floated to have earned income outside the books. Therefore, the Income Tax Officer under the circumstances had made the necessary enquiries and as far as the company’s is concerned, no further enquiry. It is of course true that certain follow-up action has to be taken from the information gathered from the company’s assessment proceedings. The information gathered is in respect of the shareholders. Their investments in the assessee-company could be unearned income outside the books which require laundering. Since the Income Tax Officer has addresses of all the parties it is necessary to make enquiries further with those persons. But, that has no impact on the assessment of the company. It will have impact on the assessment of those shareholders if they are not able to satisfactorily explain the sources. If these shareholders turned out to be persons without ostensible means, dummies or not traceable, then there is a reasonable inference that the amount represents the monies of the promoters. Even then the assessment of the company cannot be said to be erroneous.
Case Law Analysis:
Standard Cylinders (P) Ltd. v. ITO (1988) 24 ITR 504 (Del) relied on.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263
ORDER
K.S. Vishwanathan, Vice President
1. This is an appeal by the assesses against the order under Section 263 by the Commissioner setting aside the assessment made by the Income-tax Officer.
2. The assessee is a public limited company. It was registered on 27-4-1983. The accounts were closed for the first time on 30-6-1984. The assessment year 1985-86 is the first year. A return was furnished disclosing an income of Rs. 12,433. This cover the income from the date of incorporation to 30-6-1983. The object of the company is to deal in shares as well as financing. The company had purchased shares worth Rs. 5,42,708. They had also sold some of the shares on which they had incurred a loss of Rs. 94,030 as per books. Before the ITO the assessee had produced the boughl-and-sold notes in support of the share dealing. The ITO also found that they were actual purchases and sales, i.e., it was not settled by payment of difference. Apart from this the company had received income of Rs. 1,30,321 from interest and Rs. 15,348 from commission and discounting of bills. The details regarding these receipts and expenditure were also furnished before the ITO.
3. The subscribed capital of this company was Rs. 20 lakhs. A list of persons who had been allotted shares was furnished. Confirmations were also on record from the shareholders. The ITO after considering all the materials placed before him accepted the return furnished.
4. The Commissioner was of opinion that the order passed by the ITO was erroneous and prejudicial to the revenue. This was on the basis that necessary and proper enquiries were not made in regard to the share capital raised by this company. He pointed out that the ITO has taken up the hearing for the first time on 28-5-1986 and completed it on 11-6-1986. This itself would show, according to the Commissioner, that no worthwhile enquiry was done. Although details were filed by the assessee, the ITO did not make any cross-verification or enquiry. In view of this the Commissioner was of opinion that he could invoke the powers under Section 263. In support of this he referred to the decision of the Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375. He further pointed out that a large number of investment companies in Delhi were floated for laundering unaccounted money. Therefore, there was necessity to investigate into all aspects of the investment companies. The ITO ought to have found out whether the shareholders were genuine and whether the monies introduced in the books of account actually belonged to shareholders. He agreed that the company was a juristic personality but the fact cannot be made a ground or justification for non-enquiry with regard to the genuineness and creditworthiness of the shareholders. It is the duty of the ITO to pierce the corporate veil and bring to tax the unaccounted money without taking into account the fine and artificial distinction between the company on the one hand and the shareholders on the other. In any case when any money is introduced in the books of the company either by way of loan or by way of share application money Section 68 would come into play. In the circumstances the Commissioner held that it was the duty of the ITO to enquire into the source of the sum so credited. He also relied on a decision of the Tribunal in identical circumstances in the case of Shyam Kunj Trades and Agencies Ltd. [IT Appeal No. 3225 (Delhi) of 1987] dated 27-9-1988.
5. Against this order the assessee has come on appeal. Shri C.S. Aggarwal, learned counsel for the assessee submitted that the assumption of jurisdiction in this case was without any proper basis. He submitted that all the materials necessary to be furnished by the assessee has already been in record. The ITO has also conducted the necessary enquiries in a case like this. He pointed out that the company was incorporated on 27-4-1983 and the books were closed for the first time on 30-6-1984. A return was filed for the year 1985-86 showing the income for the whole period from 27-4-1983 to 30-6-1984. It was the ITO who pointed out that the total period exceeded 12 months and so the company was requested to file separate returns for the period 27-4-1983 to 30-6-1983 and a revised return for the period 1 -7-1983 to 30-6-1984. It is under these circumstances that a revised return was filed for the asst. year 1984-85. He further submitted that the full list of the shareholders had been furnished before the ITO in the course of assessment proceedings. The list of shareholders holding more than 1,000 shares were furnished to him along with the share application forms itself. The share application forms gave the full address and wherever they are assessed their GIR or PAN numbers. He then submitted that the companies cannot enquire from the shareholders the sources of funds for their share application money. For this proposition he relied on the decision of the Delhi Bench of the Tribunal in the case of Standard Cylinders (P.) Ltd. v. ITO [1988] 24 ITD 504. He then referred to the decision of the Rajasthan High Court in the case of CIT v. Trustees Anupam Charitable Trust [1987] 167 ITR 129 and submitted that the Commissioner before interfering an assessment order should be satisfied that there was an error in fact or in law. No such finding has been arrived at in this case. He then pointed out that the entire transactions are by cheque and, therefore, it was possible for the Department to trace the sources through the bank. For this purpose he relied on the decision of the Patna High Court in the case of Addl. CIT v. Bahri Bros. (P.) Ltd. [1985] 154 ITR 244. He then submitted that there was no error at all in the order of the Tribunal and, therefore, the order under Section 263 should be cancelled.
6. Shri Mandora, the learned Departmental Representative submitted that it was a recognized fact that investment companies are floated which attracted unaccounted income. In such cases the ITO necessarily has to make full enquiries. As per records no such enquiry has been made and, therefore, the order of the Commissioner was justified. He also submitted that under similar circumstances the Delhi Bench of the Tribunal has upheld the order under Section 263 as noted by the Commissioner in his order.
7. I have considered the submissions. Since the assessee is within the jurisdiction of Delhi High Court we must accept that the absence of an enquiry which was necessary on the facts of the case itself is sufficient to hold that the asst. order is erroneous and prejudicial to revenue. A strict application of this principle would mean that the ITO is bound to make enquiries in each and every case which is coming up before him. In other words, there could be no case where an assessment under Section 143(1) could be made. That is not the ratio contained in the decision. It is not necessary that in every case the ITO must make detailed enquiries. Whether enquiries are necessary or not would depend upon the facts and circumstances of the case. At page 386 Their Lordships have observed:-
The ITO is not only an adjudicature but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further enquiry.lt is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an enquiry.
Thus there are two things before an enquiry could be started, i.e., the return on the face of it should call for an enquiry. Second, the circumstances of the case are such as to provoke an enquiry. There are certain cases where the ITO is bound to make enquiries, i.e., a case where the assessee has applied for registration. It is necessary for the ITO to satisfy himself that the firm is genuine. For this purpose an enquiry is essential. Similarly where a Hindu Undivided Family claims that it has effected a partition. Here also an enquiry would be necessary. Instances similar to this could be multiplied.
8. Therefore, we must see in this case whether prima facie an enquiry is called for. I agree with the Commissioner that in this case prima facie enquiry is called for. It is an admitted position that a large number of investment and finance companies are floated with considerable amount of share capital and the purpose of floating these companies was only to bring into open the unaccounted income. The Department was a little late in being alive to these developments. But having found that investment companies are used as tools for laundering black money, it is very necessary for every ITO coming across a return filed by an investment company to enquire into the share capital.
9. Having found that there was a need to make enquiries, we must go into the issue whether the ITO had made such an enquiry. I am satisfied that the ITO has made the enquiry which he could do under the circumstances. Along with the return filed by the assessee on 27-5-1986 a large number of enclosures were sent. This contained the list of shareholders holding more than 1,000 shares. The name of the applicant for shares along with the application forms themselves were given to the ITO. These forms contained the full address of the party. Photostat copies of allotment letters had also been furnished. Share issue expenses’ details were also placed before the ITO. Now when an ITO makes an enquiry into the affairs of an investment company there are certain restrictions to the extent of his enquiries from the company. The company knows who are the shareholders and how much they had contributed. This information the ITO must extract from the company. However, the company will not know and cannot know the sources of funds for the shareholders. This is the point highlighted by the Tribunal in the case of Standard Cylinders (P.) Ltd. (supra). It is being observed :
Nowhere the Companies Act, 1956, authorises a company to seek information from its shareholders regarding the source of their investment made in its shares. The provisions of the Act also show that a company is not authorised to enquire from which source the shareholders have made their investments. It is enough for the company to know if they have made the subscriptions or investment in shares of the company, the number of shares subscribed and held and their full particulars of address to which a notice could be sent. But the company is not entitled to enquire from its shareholders about their source of money. Unless there was authority given to the company to ask for the source from its shareholders regarding investment such a query could not have been raised lawfully by the ITO in the course of making the assessment of the company. Even otherwise, the relationship of the company vis-a-vis its shareholders is not what is in the case of a partnership firm vis-a-vis its partners. The veil of incorporation makes the company a separate juridical entity distinct and distinguishable from its body of shareholders who are also liable for their own liability for tax. Therefore, a company cannot be held liable for the liability for its shareholders.
Thus, further probe of the company will be fruitless because the company cannot give any further introduction. I may also mention that this is the limit to which an enquiry could be made in the company’s case in the circumstances like this. We must keep in mind that this company was incorporated only on 27-4-1983. They closed the accounts for the first time on 30-6-1984. It was the first year. The share capital had been received in the first part of this year. The total share capital is Rs. 20 lakhs. Now unless there is some suspicion that the company itself has generated this income and had brought it into account as share capital there is no case of this Rs. 20 lakhs being treated as the income from other sources of the company. The Commissioner had made reference to Section 68. No doubt Section 68 might apply even in the case of a company on par with cash credits. There arc certain arguments against considering the share capital as a cash credit for the purpose of Section 68. Even assuming that those arguments can be ignored the fact that the company was incorporated and these monies were received immediately on incorporation are facts which cannot be ignored. Even under Section 68 on these facts no assessment could be made in the hands of the company. In this connection we may refer to the decision of Kerala High Court in the case of CIT v. Smt. P.K. Noorjehan [1980] 123 ITR 3. That was a case where a property was purchased in the name of an illiterate Muslim woman who had no ostensible source of income. Naturally no satisfactory explanation for the purchase consideration was given and Department treated the purchase consideration as income from other sources under Section 69. This was deleted. The High Court pointed out at page 6 that the unsatisfactoriness of the explanation does not and need not automatically result in deeming the value of investment to be the income of the assessee. That was still a matter within the discretion of the officer. The Tribunal took into account the complete absence of resources of the assessee and also the fact that having regard to her age and the circumstances in which she was placed, she could not be credited with having earned any income of her own. It was in these circumstances that, despite the rejection of the explanation as to undisclosed sources of income, the Tribunal refused to make an addition of the value of the investment to the income of the assessee. The High Court held that in those circumstances the Tribunal was right. The same principle in my opinion, would be applicable here also. Even if the company was not able to satisfy the ITO the sources from which the shareholders have subscribed to the capital, no assessment can be done in the hands of the company because it is an impossibility for a company which has just then been floated to have earned income outside the books. I would, therefore, give a finding that the ITO under the circumstances had made the necessary enquiries and as far as the company is concerned, no further enquiry.
10. It is of course true that certain follow-up action has to be taken from the information gathered from the company’ s assessment proceedings. The information gathered is in respect of the shareholders. Their investments in the assessee-company could be unearned income outside the books which require laundering. Since the ITO has addresses of all the parties it is necessary to make enquiries further with those persons. But that has no impact on the assessment of the company. It will have impact on the assessment of those shareholders if they are not able to satisfactorily explain the sources. If those shareholders turned out to be persons without ostensible means, dummies or not traceable, then there is a reasonable inference that the amount represents the monies of the promoters. Even then the assessment of the company cannot be said to be erroneous.
11. In this connection I should refer to the decisions of the Supreme Court in two cases. The first is the decision in Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84. In that case the ITO had made assessment in the hands of the assessee after a very perfunctory enquiry. The Commissioner found several mistakes therein. The officer had no jurisdiction over the assessee, enquiries showed there was no business done by the assessee and the assessee’s father-in-law and other sons were doing business. It is on these facts that an order was passed by the Commissioner setting aside the assessments. The Supreme Court has upheld the same on the ground that there was ample material to show that the assessments made were in haste or without any evidence or enquiry. In the second case, i.e., Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 the Supreme Court had widened the meaning to be given to the expression “prejudicial to interest of revenue”. They have held that where an income has not been earned and is not assessable, merely because the assessee wants it to be assessed in his or her hands in order to assist someone else who would have been assessed to a larger amount, an assessment so made will be erroneous and prejudicial to revenue. The Commissioner had jurisdiction to cancel the assessment and proceedings for an assessment to be initiated against some other assessee who would be liable for the income thereof. It will be noticed that although the meaning of the words ‘prejudicial to revenue’ has been widened to include a wrong assessment in the hands of a person, nevertheless the object of the enquiry is to make assessment in the hands of the right person who has earned this income. Applying this principle to the assessee before me I must hold that the enquiry is to find out who the other person is who has used the unaccounted income for applying for shares in this company. It will be clear therefrom that the assessment as such of the assessee-company is not erroneous unlike the case of Smt. Tara Devi Aggarwal (supra). In the case of Smt. Tara Devi Aggarwal (supra) the income of the person who has rightfully to be assessed was assessed in her hands. That is not the case here. Therefore, applying the principle of the Supreme Court I cannot say that the asst. order suffers from any infirmity.
12. It now remains to deal with the decision of the Delhi Bench relied on by the Commissioner. I have gone through the order. That was also a case of a company which was floated for the first time in the asst. year and which had a share capital of Rs. 24 lakhs. In the asst. order there was no discussion at all regarding the persons who had contributed to the share capital. It was on these facts that the Tribunal held that the order passed under Section 263 was correct. Since the facts in the case before me are different the ratio of this case will not be applicable.
13. In paragraph 7 of his order the Commissioner had stated that the ITO should pierce the corporate veil and bring to tax the unaccounted money without taking into account the artificial distinction between the company and the shareholders. In my opinion, this is not a sound proposition The distinction between the company and the shareholders is nothing artificial. It is real legal distinction. It is not possible with the law as it is now to treat the company and the shareholders as one and the same party. Piercing the corporate veil is to avail the Taxation Department in certain circumstances but surely in the case of a company which has just then been floated and that has hardly done any trade activity, there is no question of piercing the corporate veil for any purpose.
14. In the result, the order of the Commissioner is set aside and the appeal allowed.