ORDER
R. M. MEHTA, A.M. :
These are appeals directed against the separate orders passed by the CIT(A), one relating to the quantum and the other to the levy of penalty under S. 271(1)(c). Taking up for consideration the quantum appeal, bearing ITA No. 2371 (Del)/91, the facts may be stated as follows.
2. The appellant in this case is a Private Ltd. Company, the assessment, year involved being 1986-87 with the previous year ending on 30th Sept., 1985. During the year under consideration, it issued fresh share capital to the tune of Rs. 10 lakhs, which included the following subscribers :
Rs.
1. Shri Ashok Arora
25,000
2. Shri Satish Chopra
45,000
3. Hardev Prakash Tewari
25,000
4. Mrs. Kamla Tewari
27,500
5. Shri M.P. Tewari
25,000
6. Saroj Bala Tewari
25,000
3. The Assessing Officer in the course of assessment proceedings examined the shareholders at Serial Nos. 1 & 2 and recorded their statements. In respect of Shri Ashok Arora, it was observed that “he was a man of no means and was earning livelihood as a hawker, selling cloth on the road side pavements or in the village markets. Note was also taken of the fact that he did not maintain any books of account and nor did he have any bank account. The payment for the purchase of shares was also found to have been given in cash. On the basis of these facts, the Assessing Officer treated the sum of Rs. 25,000 attributed to Shri Ashok Arora as the income of the assessed from undisclosed sources.
4. Similarly, in respect of Shri Satish Chopra (Party at Serial No. 2), the Assessing Officer on the basis of the statement recorded came to the conclusion that he was not in a position to possess the aforesaid sum and being a salaried employee having monthly salary of Rs. 2,000 per month from which he had to meet normal expenses, he was incapable of advancing any money to the assessed for purchase of shares. The amount pertaining to Shri Satish Chopra was also found to have been advanced in cash. The said sum of Rs. 45,000 was also added as income from undisclosed sources.
5. As regards the other four persons appearing at Serial Nos. 3 to 6, the Assessing Officer observed in the assessment order that they were not produced in spite of the specific opportunities given in this behalf. He also proceeded to reject the evidence placed on record and that being the copy of khasra in evidence of owning agricultural land and in the absence of any other corroborative evidence in the ultimate analysis concluded that the aforesaid persons were also not in a position to invest any money in the purchase of shares. The addition of Rs. 1,02,500 was made in respect of the aforesaid four persons, the total addition made under the head “Income from undisclosed sources” amounting to Rs. 1,72,500. On further appeal, the CIT(A) confirmed the addition referring in this connection to the facts stated by the Assessing Officer in the assessment order and agreeing with the reasons recorded in rejecting the view point canvassed by the assessed. It is in these circumstances that a further appeal has been preferred before the Tribunal.
6. The learned counsel for the appellant at the out set invited our attention to the following undisputed facts of the case :
(i) That affidavits had been filed by all the six persons wherein all relevant details pertaining to the sources of income and the advance of fund of the company for purchase of shares were duly stated.
(ii) That, in respect of the persons appearing at Serial Nos. 1 & 2, namely, Shri Ashok Arora and Satish Chopra, summons had been issued by the Assessing Officer under S. 131 and their statements were thereafter recorded, wherein they had confirmed the advance of money to the company for the purchase of shares.
(iii) That in respect of the parties at Serial Nos. 3 to 6, they were all residents of Benaras. Although their affidavits had been filed, the ITO did not issue any summons to them and nor did he try to enforce their attendance before him to arrive at a logical conclusion, vis-a-vis the funds advanced by them to the company for the purchase of shares.
(iv) That all the aforesaid persons were genuine, and inasmuch as they had categorically stated in the affidavits and in two of the cases in their depositions that they had purchased shares of the company and had also explained the sources of the funds, the onus which lay on the assessed stood discharged.
(v) That it was not incumbent upon the company to ascertain from its shareholders the sources of their funds and in case the ITO had to make enquiries, he could do so in the respective cases and the natural consequence of such enquiries could follows once again in the individual cases.
(vi) That on the facts of the present case, it could not be said that the money given by the aforesaid persons towards the shares in the assessed-company could be said to be the money of the said company from undisclosed sources.
7. On the basis of the aforesaid submissions, the learned counsel contended that the addition sustained by the CIT(A) be deleted. In support of his arguments, he placed reliance on the following decision :
CIT vs. Stellar Investments Ltd. (1991) 192 ITR 287 (Del)
Standard Cylinders P. Ltd. vs. ITO (1988) 24 ITD 504 (Del)
Nathu Ram Prem Chand vs. CIT (1963) 49 ITR 561 (All)
CIT vs. Orissa Corpn. P. Ltd. (1986) 159 ITR 78 (SC)
Parimisetti Seetharamamma vs. CIT (1965) 57 ITR 532 (SC)
8. The learned Departmental Representative on the other hand, supported the orders passed by the ITO and the CIT(A) and the subsequent arguments advanced by him were a reiteration of the reasons recorded by these authorities in making and confirming the impugned addition. According to the Departmental Representative, the Assessing Officer had made the relevant enquiries and also recorded the statements of the parties at Serial Nos. 1 & 2 and being dissatisfied with the explanations given, he had made the additions. As regards the parties at Serial Nos. 3 to 6, the submission was that mere filing of the affidavits was not enough, since these persons had also to be produced before the Assessing Officer which had not been done. He, accordingly, made an impassioned plea for the confirmation of the order passed by the CIT(A).
9. We have examined the rival submissions and have also perused the material on record to which our attention was invited by the parties and which appear on the compilation furnished by the learned counsel for the assessed. The decisions cited at the bar have also been considered. At the out set, we may refer to the material/evidence which was placed by the assessed before the tax authorities and this being :
(i) Affidavits of all the persons stating categorically the sources of their income and the fact of advancing funds of the assessed-company towards the purchase of shares and allotment to them of such shares by the company.
(ii) Copies of the statements recorded by the Assessing Officer in respect of Shri Ashok Arora and Shri Satish Chopra once again confirming what they had already stated in their affidavits earlier.
(iii) Copies of the application forms addressed by the aforesaid persons to the company making a request for the allotment of shares.
(iv) Their copies of account in the books of the assessed-company giving details of the amounts advanced on various dates.
(v) Copies of Form No. 2 being the return of allotment of shares filed with the Registrar of Companies pursuant to S. 75(1) of the Companies Act, 1956 which includes the names of the aforesaid six persons.
10. It is not disputed before us on behalf of the Revenue that summons under S. 131 were not issued to the four persons who were residents of Benaras and nor was any other attempt made to examine them vis-a-vis the funds advanced to the company for purchase of shares. In other words, the affidavits filed by them were not discredited by the Assessing Officer. Even the parties at Serial Nos. 1 & 2, namely Ashok Arora and Satish Chopra, whose statements were recorded by the Assessing Officer owned up the purchase of shares and the issue of share certificates to them by the company. It is a different matter that the Assessing Officer proceeded to hold in the ultimate analysis that these two persons were not capable of possessing funds of the magnitude which had been advanced to the company for purchase of shares.
11. At this stage, we may refer to some of the decisions cited by the learned counsel and for the purpose of disposing of the appeal, the decision of the Hon able Delhi High Court in the case of Stellar Investments Ltd. (supra) and that of the Delhi Benches of the Tribunal in the case of Standard Cylinders P. Ltd. (supra) would be relevant. It may not be out of place to mention that the Benches at Delhi have been taking the consistent view that an addition in respect of the funds invested in the purchase of shares cannot be made in the hands of a company, whether public or private and any action on the part of the Department should be directed in the individual assessments of the persons concerned. We refer to one such unreported decision, namely, M/s. Sahu Refrigeration Industries (P) Ltd. vs. ITO in ITA No. 3527/Del/89 dt. 17th Aug., 1992. This is what the Tribunal had to say on more or less identical facts :
“When the persons were genuine, there is no obligation cast upon the assessed-company to enquire from the shareholders when they apply for the shares to find out the source of share money. In so far as the assessed-company is concerned, the obligation cast upon it under the Companies Act is very specific and clear and that is to receive the money from the shareholders and then consider the share application in a meeting of the Board of Directors and then to decide whether or not to allot shares. Once allotment is made, he becomes a shareholder of the company subject to all the rights and legal obligations granted and imposed by the Companies Act. The Companies Act did not empower any company to enquire into the source for the shareholders when they apply for shares. A list of share holders is to be filed with the Registrar of Companies under the Companies Act. That becomes a conclusive proof of the existence of the shareholders. Therefore, the ITO, in our opinion, has erred in requiring the assessed to explain and prove the source of the funds for the shareholders and then to treat the sum in question as the undisclosed income of the assessed. There are too far fetched conclusions based upon conjectures and surmises and have no legal basis to support. Assuming for the sake of argument that they are the undisclosed income of the assessed introduced as and by way of share application money in the names of persons, who are not capable of advancing money, then that money becomes the money introduced by the assessed under the benami names. Under the Benami Transactions (Prohibition of the right to recover property) Act passed by the Parliament, which has got retrospective effect, the money put in the names of the benami will become the income of the benami and no real owner can claim that money as his money. Such being the case, the money put in the names of benami will cease to be the income the assessed and no company would be interested in parting with its money in benami names when it knows that it cannot have any control over that money factually and legally to recover it.
In the case of CIT vs. Stellar Investment Ltd. (supra), the subscribed capital of the company was increased. Though the ITO accepted the increase, the CIT in revision set aside the order of assessment being of the view that there had been a device of converting black money into white money by issuing shares with the help of formation of an investment company and that the Assessing Officer did not make any enquiries with regard to the genuineness of the subscribers to the capital. This view was reversed on appeal by the Tribunal. On a reference to the High Court at the instance of the CIT, the Delhi High Court held that even if it is assumed that the subscribers to the increased share capital were not genuine, under no circumstances could the amount of share capital be regarded as the undisclosed income of the company. The High Court went to the extent of saying that no question of law arose out of the order of the Tribunal. The High Court pointed out that :
“It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons. If the assessment of the persons who alleged to have really advanced the money is sought to be reopened that would have made some sense but we fail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself.
This decision is given by the jurisdictional High Court, which is binding on us. Following the ruling of the Delhi High Court which fortifies our view, we hold that the Department is not at all justified in treating the increase in capital as the undisclosed income of the assessed.”
According to us, the aforesaid observations of the Tribunal would apply to the facts of the present case as well. It can, however, be said in the present case that the Assessing Officer did make some enquiries from two of the shareholders and in respect of four others, he may have asked the assessed to produce then without the issue of formal summons under S. 131. Even if that be so, the observations of the Tribunal in the unreported decision (supra) as follows would be relevant :
“The question of the shareholders appearing before the ITO or the question of assessed producing them before the ITO or the question of assessed explaining the source of the income of the shareholders do not, therefore, become relevant.
In the case of Standard Cylinders (P) Ltd. vs. ITO reported in (1988) 24 ITD 504 (Del), Delhi D Bench had also come to the same view that the company under the Companies Act has no authority to enquire into the source of investment made by the shareholders in the shares of the company. The Bench in this case pointed out the distinction between the relationship of a company and a shareholder vis-a-vis a partner and a partnership firm.”
12. We are also of the view that unless and until the Department has not proved by cogent evidence that the funds advanced to the company for the purchase of shares had, in fact, represented the undisclosed income of the company itself, there would be no legal basis, whatsoever, to make any addition. In the final analysis, we set aside the order passed by the CIT(A) cancelling in the process the addition of Rs. 1,72,500 made by the Assessing Officer and sustained by the first appellate authority.
13. ITA No. 2372/ (Del)/91 is consequential to the quantum appeal, inasmuch as this pertains to the penalty of Rs. 1,25,000 imposed on the assessed-company vis-a-vis the addition of Rs. 1,72,500 inasmuch as we have deleted the addition while disposing of the quantum appeal, the penalty under S. 271(1)(c) would not survive and the same is hereby cancelled. The arguments advanced by both the parties on the merits of the case are, accordingly, not discussed.
14. The appeals are allowed.