ORDER
B.L. Khatri, A.M.
1. This is an appeal by the assessee against the order of CIT(A), Ajmer, for asst. yr. 1997-98. The appellant agitated on various grounds which are being discussed and decided in this order.
2. Ground No. 1 is general and the ground regarding quashing of the order is not being pressed by the learned counsel.
3. Ground No. 2–Share application money added under Section 68.–During the year under appeal the assessee-company increased the subscribed share capital and received share application money from 8 shareholders. The AO had made an addition of Rs. 1,30,000 for unexplained share application money in the names of 8 persons under Section 68 of the IT Act. The learned CIT(A) had confirmed the same. The CIT(A) observed that the case of CIT v. Stellar Investment Ltd. (1991) 192 ITR 287 (Del) had already been considered by the Full Bench of the Delhi High Court in the case of CIT v. Sophia Finance Ltd (1993) 205 ITR 98 (Del)(FB). The learned CIT(A) observed that the Full Bench of the Delhi High Court in the case of Sophia Finance Ltd. has held that Section 68 is very widely worded and the credits of share application money fall within the mischief of this section. The ratio of the decision is 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 capital receipt. The Hon’ble Supreme Court has affirmed the decision of the Hon’ble Delhi High Court in the case of CIT v. Steller Investment Ltd. (2001) 251 ITR 263 (SC). The learned CIT(A) observed that the Hon’ble Supreme Court has not dealt with the scope of enquiry and applicability of Section 68 in respect of the credits of share application money. The Hon’ble Supreme Court had affirmed the judgment of Hon’ble Delhi High Court in the case of Steller Investment Ltd. on the ground that Tribunal in that case had drawn its conclusion on facts, and, therefore, no interference was called for. From the perusal of the brief judgment, the CIT(A) observed that probably the Full Bench decision of the Hon’ble Delhi High Court in the case of Sophia Finance Ltd. (supra) was not brought to the notice of their Lordships of the Hon’ble Supreme Court. He is of the opinion that in the circumstances of the case the decision of the Hon’ble Supreme Court in the case of Steller Investment Ltd. had not changed the legal position laid down by the Hon’ble High Court in the case of Sophia Finance Ltd. with regard to the scope of enquiry and applicability of Section 68 in respect of credits of share application money.
4. The CIT(A) held that the provisions of Section 68 are definitely applicable to the contributions made towards share capital also in the case of a private limited company. In the case of a private limited company there is close and proximate relationship between the promoters/directors and the shareholders or depositors. The closely-held companies are permitted to accept the subscriptions of share capital or deposits only from the friends or relatives of the promoters/directors and such companies are not allowed to accept subscriptions or deposits from the general public. However, in the case of widely held companies, the situation is different. There is no nexus between
the promoters and an ordinary shareholder. Any person can subscribe to the shares in a public issue. In the case of a private limited company on account of close and proximate relationship between the promoters/directors and shareholders or depositors, the subscriptions of share capital or deposits partake the character of a cash credit and the provisions of Section 68 are, therefore, applicable. In this view of the matter, the argument of the learned counsel that in the present case since the deposits represented the share application money and, therefore, the provisions of Section 68 are inapplicable could not be accepted by the CIT(A).
5. The learned authorised representative has contended that the present case is directly covered by the decision of Hon’ble Delhi High Court in the case of CIT v. Steller Investment Ltd. (supra) which has now been affirmed by the Hon’ble Supreme Court in (2001) 251 ITR 263 (SC) (supra). The learned authorised representative relied upon the case of Ajay (India) Ltd. v. AO in ITA No. 156 (Ju)/2001 of the Jodhpur Bench.
6. The learned authorised representative has also quoted as under from the judgment of Hon’ble Delhi High Court in the case of Steller Investment (supra).
“It is evident that even if it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. 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 are alleged to have really advanced the money is sought to be reopened, that would have made some sense but we fall to understand as to how this amount of increased share capital can be assessed in the hands of the company itself.”
7. He has also relied on the case of Sh. Bharka Synthetics Ltd. v. Asstt. CIT in ITA No. 155 (Ju) 2001 of this Bench and Swastika Suitings Ltd. v. AO 25 TW 273 (Jp).
8. Alternately and without prejudice to above, it was submitted by the learned counsel that the CIT(A) himself has agreed that the decision of Hon’ble Delhi High Court in the case of Sophia Finance Ltd. (supra) shall apply. The Hon’ble High Court laid down that although Section 68 will apply yet the identity of the shareholder and the payment of share application money by him, if proved, there is no further requirement to prove the capacity of the shareholder by the assessee. He also relied upon the case of Shivam Synthetic’s case 24 TW 397 at p. 399. It was held as under :
“As regards contribution of amount as share money, the Hon’ble Full Bench of the Delhi High Court in the case of CIT v. Sophia Finance Ltd. (1993) 205 ITR 98 (Del)(FB) has held that when an assessee-company represents that it had issued shares on the receipt of share application money then the amounts so received would be credited in the books of accounts of the company. The ITO would be entitled and it would indeed be his duty to enquire whether the alleged shareholders exist, then possibly no further enquiry need be made. But if the ITO finds that the alleged shareholders do not exist then it would mean that there is no valid issuance of share capital Shares cannot be issued in the name of non-existing persons. The
Hon’ble High Court has further held that if the shareholders are identified and it is established that they are (sic have) invested money in purchase of shares, then the amount received by the company would be regarded as capital receipt. The aforesaid observations of the Hon’ble Delhi High Court clearly indicate that the burden of the appellant company in relation to share application money is much lighter. Once the identity of the shareholder is established and they accept the fact of investment made in shares of that company, ordinarily the burden which lies on the said company will stand discharged.”.
The learned authorised representative further submitted that the identity of all the shareholders had been established. All the shareholders are regular income-tax assessees not from this year but from the past. Their confirmations with complete addresses were also filed before the lower authorities. All the shareholders have been allotted shares later on and their distinctive numbers are also available in the chart (PB A). The return required under the Companies Act, 1956, were duly filed to the Registrar of Companies also. The AO or the CIT(A) did not doubt their identity, which is thus established. The payments by shareholders were also established. All the shareholders made the payments by account payee cheque. The amount has (sic) respective bank account. Their cheque numbers are available in the chart (PB A) as also the copies of their bank account in the paper book. Not only this but even the copy of the bank statement of the appellant is also in the P.B. Since all of them are regular income-tax assessees, the sources are their regular income/accumulation thereof. In the first 3 cases even their regular cash books were produced from which the accumulation and the source of this payment is clearly ascertainable. Therefore, the fact that the payment was made by them is fully established on record and there is absolutely no contrary material available on record to disprove this. He also relied upon the following case law :
(1) Meera Engineering & Commercial Industries Co. (P) Ltd. v. Asstt. CIT (1997) 58 TTJ (Jab) 527;
(2) Gorawara Plastic & General Industries (P) Ltd- v. Dy. CIT (1999) 63 TTJ (Del) 329;
(3) Progressive Services Ltd. v. ITO (1991) 40 TTJ (Cal) 595;
(4) Karimatharuvi Tea Estates Ltd. and Anr. v. Dy. CIT (2001) 247 ITR 22 (Ker) ;
(5) Allen Bradley India Ltd. v. Dy. CIT (2002) 74 TTJ (Del) 604 : (2002) 80 ITD 43 (Del); and
(6) Asstt. CIT v. Anima Investment Ltd. (2000) 68 TTJ (Del)(TM) 1 : (2001) 247 ITR 22 (AT) (Del)(TM).
9. The Hon’ble Jaipur and Jodhpur Benches of Tribunal having interpreted the decision in a particular manner, the interpretation by the CIT(A) contrary thereto and against the decision cannot be upheld. The two basic conditions as to identity of shareholder and payment of application money by them in the present case have been fully established and there is absolutely no material on record to show the contrary.
10. Alternatively and without prejudice to above even on merits also there is
absolutely no case to have made addition even under Section 69 as the assessee had proved the identity and capacity of the creditors as also the genuineness of the transactions by furnishing GIR/PAN. The assessee was asked to produce Smt. Sunita Nuwal but could not be produced at the relevant time as she was just married and was out of station. Thereafter the AO did not make any further enquiry. He relied upon the judgment in the case of CIT v. Orissa Corporation Ltd. (1986) 159 ITR 78 (SC).
11. With regard to the capacity in the first three cases, cash books were submitted which was not disputed nor any contrary material is available. Others are also regular income-tax assessees. The assessee is not required to prove the source of source as held in 24 TW 147 (Jp).
12. The assessee had discharged the initial burden cast upon it and how it is for the Department to discharge their burden, which they had totally failed. It has been held that the moment initial burden is discharged by the assessee, no addition under Section 68 can be made. Reference is invited to the cases of Sarogi Credit Corporation v. CIT (1976) 103 ITR 344 (Pat) and Amar Singh Kishan Chand v. ITO (2000) 66 TTJ (Jd) 724. Keeping in view all these facts of the case and legal position, no addition is called for on account of share application money.
13. The learned Departmental Representative relied upon the orders of the authorities below.
14. We have considered the rival submissions. The assessee had shown the share application money in the names of following eight persons :
Name
Amount
Rs.
1. Anil Nuwal
3,50,000
2. Madhu Sudan Nuwal
3,50,000
3. Aunita Nuwal
2,00,000
4. Kailash Chand Dad
1,00,000
5. Bal Mukand Somani
1,00,000
6. Smt. Asha Mathur
50,000
7. K.G. Jhanwar
1,00,000
8. Dev Kishan Achanya
50,000
13,00,000
The learned authorised representative had relied upon the case of Steller Investment Ltd. (supra) which has now been affirmed by the Hon’ble Supreme Court in the case of CIT v. Steller Investment Ltd. (supra). In this judgment of the Hon’ble Supreme Court, the case of Sophia Finance Ltd. (supra) had not been considered. In the case of Sophia Finance Ltd. (supra) it was held that Section 68 is very widely worded and the AO is not precluded from making an enquiry as to the nature and source of a sum credited in the books of account of the assessee-company even if the same is credited as receipt of share application money….. In such a case the AO 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, possibly no further enquiry need be made. But if the AO finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. The Hon’ble High Court has further held that if the shareholders are identified and it is established that they have invested money in purchase of shares then the amount received by the company would be regarded as capital receipt. In this case the appellant has quoted GIR Nos./PAN wherever allotted by the Department. All the persons are being assessed to tax. The payments had been received through cheques and these cheques had already been credited in bank account of the appellant. In the first three cases cash books have also been produced. Therefore, as per the judgment of Steller Investment Ltd. (supra) and Sophia Finance Ltd. (supra) no addition can be made on account of share application money as the assessee has established the identity of the share applicants and also proved that the money was invested by them. Even if we concede that the provisions of Section 68 are applicable in this case, we find that even then the appellant had discharged the initial onus cast upon it as held by the Hon’ble Supreme Court in the case of CIT v. Orissa Corporation Ltd. (supra) wherein it was held that in the case the appellant had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notice under Section 131 at the instance of the appellant, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were creditworthy. There was no effort made to pursue the so-called alleged creditors. We find that the initial onus cast upon it has been discharged. It was held by the Hon’ble Patna High Court in the case of Addl. CIT v. Bahri Bros. (P) Ltd. (1985) 154 ITR 244 (Pat) that the assessee filed details of loans stating the nature and the mode of transactions. The creditors gave the amount in question to the assessee by account payee cheques which were encashed by the assessee through its own bank. The cheques had also been honoured in favour of the assessee. When the assessee disclosed the names of the creditors and the names of the banks on which the cheques were drawn, the assessee discharged the primary onus and the assessee not only disclosed the identity of the creditors but also the sources of income. Then the onus shifted on the Department to verify. We find that the Department has not discharged the onus cast upon it after initial onus having been discharged by the assessee by filing necessary particulars. The AO should have recorded the statements of all the persons and should have given a specific finding to the effect that they had no means to make deposit the money belonged to the appellant. In the absence of such a finding by the AO. We hereby delete the addition of Rs. 13,00,000 made by the AO. and sustained by the CIT(A) on account of unexplained share application money. However, the AO is free to make enquiry and take necessary action in the hands of the share applicants.
15. Ground No. 3–Cash credits of Rs. 1,46,300 added under Section 68.–The appellant had received cash credits of Rs. 1,46,300 in the names of following persons :
Rs.
1.
Sunita Nuwal
26,500
2.
Madhu Sudan Nuwal
30,000
3.
Gordhan Sharma
19,300
4.
Kailash Sharma
19,000
5.
Rameshwar Lal
18,500
6.
Ram Nath
18,000
7.
Ladu Lal
15,000
1,46,300
The AO had made the addition on the ground that these persons were not in a position to save the amount of cash credits advanced by them to the appellant. The learned CIT(A) has also confirmed the addition.
16. The learned authorised representative submitted that Sunita Nuwal is a regular income-tax assessee. However, no PAN was allotted so far though she is an old income-tax assessee. The amount was advanced by two account payee cheques which duly appears in the bank statement of the creditor (PB 86). In the balance sheet (PB 82) she had duly disclosed this advance to the assessee. It is further notable that even cash book of this creditor was produced before the AO. Here confirmation appears at PB 74. The objection of the lower authorities was nothing more than a suspicion without any cogent material.
17. Madhu Sudan Nuwal is also a regular old income-tax assessee. He has also advanced by account payee cheque which appears in the bank statement of the creditor (PB 68-69). Further, the creditor has disclosed in his balance sheet (PB 64). His confirmation is at PB 53.
18. Gordhan Sharma, Kailash Sharma and Rameshwar Lal are not income-tax assessees yet it is notable that statements of all the three creditors were duly recorded wherein they categorically confirmed having advanced money to the appellant and also explained the source thereof which are available at PB 115-121.
19. Ramnath and Ladulal could not be produced because they were out of station at that relevant time. It was proved that the payments had been made by cheques and the cash confirmed by the creditors.
20. The learned Departmental Representative relied upon the orders of the authorities below.
21. We have considered the rival submissions. We find that in the cases of Smt. Sunita Nuwal and Madhu Sudan Nuwal the assessee has discharged the initial onus cast upon it by furnishing necessary particulars. In the cases of Gordhan Sharma, Kailash Sharma and Rameshwar Lal, necessary confirmations had been filed. Their statements have been recorded. The additions had been made only on the ground that they were not in a position to save to sum of Rs. 19,300, Rs. 19,000 and Rs. 18,500. We are of the opinion that even a person with meagre income can save such petty amounts. These are not big amounts. Therefore, no addition is called for in the names of these persons. The addition made by the AO and sustained by the CIT(A) is hereby deleted.
22. As regards the cash credits of Rs. 18,000 and Rs. 15,000 in the names of Ram Nath and Ladu Lal, respectively, we find that these persons could not be produced before the AO only on the pretext that they were out of station and no specific reasons had been given by the assessee. These are cash payments. Therefore, the addition of Rs. 18,000 in the name of Ram Nath and addition of Rs. 15,000 in the name of Ladu Lal are hereby confirmed. We direct the AO to do accordingly.
23. In the result, the appeal is allowed in part.