Delhi High Court

Indradhan Agro Products Ltd. vs Dy. Cit on 18 August, 2003

Equivalent citations: (2004) 89 TTJ Del 158

ORDER

T.K Chopra, AM

This appeal fied by the assessed is directed against block assessment order dt. 31-10-2001, made by Deputy Commissioner, Circle II(1), New Delhi, for the block period 1-10-1986 to 19-4-1996, whereby the entire share capital of the assessed- company amounting to Rs. 2,27,15,000 has been assessed as undisclosed income. The assessed has come up in appeal raising the following grounds of appeal

"1. The order appealed from, determining total undisclosed income of the appellate at Rs. 2,27,15,000 under section 158BD of the Income Tax Act, 1961, is illegal, wrong, non-operative and void inter alia on the following grounds :

(a) That the impugned order is illegal, void, inoperative and barred by limitation.

(b) That the notice dated 12-10-2000, issued by the assessing officer under section 158BC/158BD was without authority of law inasmuch as the assessing officer completely lacked jurisdiction in the absence of any satisfaction having been reached by assessing officer of Shri Alok Aggarwal, being the person search under section 132 against the appellant, as 'the other person' referred to in that section, hence, the impugned order passed against the appellant, who was subjected neither under section 132, nor under section 132A, is illegal and void.

(c) That the impugned order is also void being barred by limitation, inasmuch the impugned notice dated 12-10-2000, under section 158BC/158BD was issued after the expiry of the period within which satisfaction, as envisaged under section 158BD, was required to be reached by assessing officer of the person search under section 132, but within which period no such satisfaction was reached against the appellant as "the other person" referred to in that section. In fact, no such satisfaction was reached so as to authorize the assessing officer to assume valid jurisdiction under section 158BD/158BC against the appellant.

(d) That the impugned order is also vitiated and unsustainable in law, as it was passed in breach of principles of natural justice and fair play, without giving any opportunity of advance hearing to the appellant before issuing the impugned notice under section 158BC/158BD to enable the appellant to rebut any material and explaining its case.

2.1. That without prejudice to the above grounds urged in paras a to d of the ground No. 1, the learned assessing officer illegally brought to tax the entire paid up share capital of the appellant company at Rs. 2,27,15,000 as its undisclosed income for the block period, notwithstanding that all such share capital stood disclosed to the department, prior to the date of search on 19-4-1996, under section 132 against Shri Alok Aggarwal.

2.2. That the assessing officer, in taxing the entire, share capital of the company wrongly and illegally, held part of all such paid up share capital to the extent of Rs. 1,12,25,000 subscribed by shareholders during the assessment year 1996-97, as undisclosed income of the appellant for the block period, even though the said amount of Rs. 1,12,25,000 already stood taxed in the hands of the appellant in the regular assessment made under section 143(3) prior to passing the impugned block assessment order. Thus, the amount of Rs. 1,12,25,000 is taxed twice over, once in the assessment order made under section 143(3) for assessment year 1996-97 and again as part of the total alleged undisclosed income determined under the impugned order at Rs. 2,27,15,000.

2.3. The learned assessing officer acted illegally by improperly disregarding the evidence showing the identity and creditworthiness of the shareholders and the ratio of decisions of the Apex Court in CIT v. Steller Investments (2001) 115 Taxman 99 (SC) and of Full Bench of Delhi High Court in CIT v. Sophia Finance & Investments Ltd. (1994) 205 ITR 98 (Del)(FB).

3. That the order charging of interest under section 158BFA and initiating penalty proceedings under section 158BFA in the impugned order is also challenged as being without jurisdiction and without authority of law.

4. The appellant denies its liability to the demand of Rs. 1,60,48,148 on account of tax and interest charged under section 158BFA as specified in the notice of demand issued under section 156 along with the impugned order.

5. The appellant craves leave to add to, alter, vary, modify or otherwise amend the grounds of appeal before the appeal is finally disposed of."

2. Learned counsel for the assessed- company filed paper books in three volumes running into 311 pages as well as synopsis of his arguments enclosing therewith list of judicial authorities cited in support of the assessed's case. Learned counsel has also filed copies of orders of the Tribunal in the other cases of the group arguing that these decisions squarely support the case of the assessed for deletion of the impugned addition on account of share capital.

3. At the outset, we may briefly set out relevant facts having a bearing on the point in issue arising in the present appeal.

4. The assessed is a closely-held public limited company incorporated and registered under the Companies Act, 1956, on 9-9-1992. It has been filing its returns of income from assessment year 1993-94 onwards, as per the following particulars (p. 251 of the paper book)

Asst. yr.

Date of filing of Return

Remarks

1993-94

31-12-1993

Assessed on nil income under section 143(1)(a) vide intimation dated 13-6-1994.

1994-95

24-11-1994

Returned income Rs. 1,87,972 assessed at Rs. 3,94,972 under section 143(3) vide order dated 31-10-1996. Addition of Rs. 2 lacs has been made on account of share capital appearing in the name of MKN Portfolio Ltd..

1995-96

30-11-1995

Assessed under section 143(3) vide order dated 23-1-1998, accepting the return income of Rs. 4,00,753 introduced in the books, for want of confirmations from the shareholder.

1996-97

30-11-1996

Assessed under section 143(3) vide order, dated 29-5-1998, accepting the total loss of Rs. 1,64,92,660. A sum of Rs. 1,12,25,000 has been surrendered in the return on account of additional share capital "offered as income under section 68 for want of confirmation."

1997-98

29-11-1997

Assessed under section 143(3) vide order dated 30-11-2000. Additional share capital of Rs. 35,50,000 has been accepted as genuine.

1998-99

30-11-1998

Assessed under section 143(3) vide order dated 30-11-2000. Additional share dpital of Rs. 2.27 crores during the year has been accepted as genuine after verification.

Search operations were conducted by the Income Tax Authorities under section 132 of the Income Tax Act, 1961, at the officer residential premises of Shri Alok Aggarwal, a practicing chartered accountant on 19-4-1996, resulting in the seizure of books of account, documents and records pertaining to a number of companies including, inter alia, the assessed- company. The assessing officer initiated block assessment proceedings under section 158BC in the case of Shri Alok Aggarwal and made the block assessment on, undisclosed income of Rs. 25.50 crores including, inter alia, the entire share capital of the assessed-company being Rs. 2,27,15,000. The said block assessment was, however, set aside by the Tribunal on 8-8-1997, for framing a fresh assessment after allowing opportunity to the said assessed. Meanwhile, assessing officer initiated proceedings under section 158BD read with section 158BC in the case of the assessed-company by issue of notice on 12-10-2000. The assessed filed block return on 27-8-2001, showing undisclosed income at nil figure.

5. Pursuant to aforesaid directions of the Tribunal, the assessing officer passed fresh block assessment order in the case of Shri Alok aggarwal wherein addition to the extent of Rs. 1,02,15,000 was, inter alia, made on protective basis on account of share capital of the assessed- company. The Tribunal, however, deleted the protective addition vide its order dated 14-2-, 2003. Copy of the Tribunal's order has been filed by the learned counsel before us.

6. In the case of the assessed-company, assessing officer proceeded to make the block assessment treating the entire share capital of Rs. 2,27,15,000 as undisclosed income. The share capital has been reflected in the books for various assessment years as under :

Asst. yr.

Share capital

1993-94

15,500

1994-95

69,22,000

1995-96

45,52,500

1996-97

1,12,25,000

Total

2,27,15,000

While making the impugned addition the assessing officer observed that material seized from the premises of Shri Alok Aggarwal contained books of account, documents and papers which indicate that share capital of the assessed-company was non-genuine. The observations of the assessing officer at p. 3 of the impugned assessment order wherein reference has been made to the seized material are extracted below:

"Scrutiny of the seized material which contained bundles of loose papers and certain registers like share application and allotment register, register of director shareholding, etc., revealed that in the case of every alleged shareholder, a set of document has been kept. Each set contained the following documents :

1. Copy of the cheque by which the share application money has been received.

2. Share application form duly filled and signed.

3. Signed blank receipt for sale of the allotted shares. All the details like the amount, name of the purchaser, the rate at which the shares are to be sold, the distinctive numbers and the details of mode of payment, etc., have not been filled in the receipt.

4. Duly filled confirmations of the shareholder containing details and source of investment along with the GIR No., etc.

5. Blank signed power of attorney for representing the shareholder before the tax authorities.

6. Affidavit containing declaration of the shareholder confirming the allotment and the receipt of shares. The space meant for distinctive numbers of the shares have been kept blank in many of such affidavits.

7. Copy of the income-tax order (s. 143(1)(a)).

8. Copy of bank account of the shareholder.

9. Document regarding source of income.

10. Blank share transfer forms duly signed by the alleged shareholder."

Referring to the aforesaid material, the assessing officer further observed that "a close study of these documents proves beyond any doubt that all these transactions are Benami and the alleged shareholders have lent their names and provided book entries. The availability of signed blank receipts and signed blank share transfer forms clearly shows that in case some shareholders later claim the shares to be of their, then these forms could be used against them. Signed power of attorney has been taken so that in case of any enquiry, some representative of the promoter could appear before the authorities without the production of the concerned person. Similarly, in the affidavits it has been declared by the alleged shareholders that they have received the share certificates though these were found to be lying in the premises No. 245, Anarkali Bazar, New Delhi, possessed by Mr. Alok Aggarwal. This fact is further strengthened by absense of distinctive numbers in these affidavits. The share certificates have indeed not been delivered is further confirmed from the fact that blank signed allotment letters have been seized. The alleged shareholders have signed blank allotment letters acknowledging delivery of the shares but the name and address of the shareholder, distinctive numbers of the share certificates, etc., have not been filled up which proves that the share certificates have not been sent to the so called shareholders."

7. With regard to the contention of the assessed that share capital introduced in the books during the period relevant for assessment year 1996-97 amounting to Rs. 1,12,25,000 has already been surrendered in the return of income filed for assessment year 1996-97, the assessing officer rejected the contention on the ground that the return of income for assessment year 1996-97 has been ffied on 30-11-1996, i.e., after the date of the search surrendering the share capital since there were substantial losses incurred by the assessed- company which offset the surrendered amount.

8. Aggrieved, the assessed has come up in appeal before us.

9. Learned counsel, assailing the impugned addition of Rs. 2,27,15,000 made by the assessing officer, did not press ground No. 1 against legality of the impugned assessment. We would accordingly dismiss ground No. 1.

10. Learned counsel focussed his arguments against the merits, legal and factual, of the impugned addition of Rs. 2,27,15,000 made on account of share capital of the assessed- company and argued that the share capital raised by the assessed-company in various years has been duly recorded in the regular books of account which have been audited and audit reports along with the statement of accounts have been duly submitted before the Income Tax Authorities while filing the returns of income. Learned counsel referred to the list of shareholders with complete addresses placed in the paper book Vol. 2, at pp. 141 to 149 and argued that shareholders are identifiable persons/entities and assessing officer has himself referred to the fact at p. 3 of the assessment order that all the shareholders are assessed to tax and confirmations from all the shareholders have been duly found from the premises of Shri Alok Aggarwal at 245, Anarkali Bazar, New Delhi. According to the learned counsel, since the shareholders of the assessed-company are identifiable and are assessed to tax, there is no occasion for the assessing officer to invoke the provisions of section 68 to treat the entire share capital of Rs. 2,27,15,000 as undisclosed income in the hands of the assessed-company. Learned counsel heavily relied upon the decision of jurisdictional High Court, i.e., Delhi High Court in the case of CIT v. Steller Investment Ltd. (1991) 192 ITR 287 (Del), affirmed by the Supreme Court in (2001) 251 ITR 263 (SC) (supra), wherein it has been held that once the shareholders are found to be genuine persons, there is no occasion for -treating the share capital as non-genuine under section 68 of the Income Tax Act. Learned counsel further pointed out that merely because scrips of the assessed-company for an amount of Rs. 1,02,15,000 have been found at the premises of books of account of the assessed-company. It was, in these circumstances, that the books of account, share registers, allotment registers, etc. were lying with the chartered accountant for completion of records. Along with the records of the assessed-company the revenue authorities have also found books of account, documents and records of various other companies as well as individuals, HUFs, firms, etc., whose financial matters like audit, income-tax, etc., were being looked after by the said Shri Alok Aggarwal. Learned counsel further submitted that merely because such records were found at the premises of Shri Alok Aggarwal, there is no justification for the assessing officer to hastily draw the conclusion that the share capital of the assessed-company was non-genuine.

12. Learned counsel further submitted that out of the share capital of the company, a sum of Rs. 1,12,25,000 has been subscribed by the shareholders during the period relevant for assessment year 1996-97. Particulars of such shareholders along with their complete addresses have been placed in the paper book at pp. 150 to 160.. This share capital of Rs. 1,12,25,000 introduced for assessment year 1996-97 has been surrendered in the return of income filed for assessment year 1996-97 since the assessed was under the impression that confirmations from the shareholders were not available. Learned counsel referred to the letter placed in the paper book at pp. 164 to 169 wherein the assessed has explained the circumstances under which the amount has been surrendered in the return :

"The next point relates to reasons for surrender of share capital raised during the year. It is submitted that the assessed had its further issue of share capital made during the year subscribed through persons known to the assessed. The assessed in order to verify the creditworthiness of the persons who had subscribed to the share capital during the year asked them to show their records/confirm the source of investment made.'It appeared that the source of investment made by them was dubious and not straight and clear as these persons did not appear to co-operate and give evidence of the genuine and confirmed source of their investments. The assessed therefore, thought it to be prudent to offer the amount of such share capital for taxation under section 68 suo moto to buy peace even before it could be asked to prove the same and the assessed failed to do so for want of co-operation from these shareholders. Thus, the surrender was for reasons beyond the control of the assessed and in good faith. "

Copy of the assessment order for assessment year 1996-97 is placed in the paper book at p. 66 which indicates that assessment has been made under section 143(3) on 29-5-1998, accepting the return of loss filed by the assessed on 30-10-1996. According to the learned counsel, since the share capital of Rs. 1,12,25,000 has already been assessed by the assessing officer in the regular assessment under section 143(3) for assessment year 1996-97, the same amount cannot form part of the undisclosed income by virtue of the specific prohibition as contained under Explanation below section 158BA(2).

13. Learned counsel further argued that the impugned addition of Rs. 2,27,15,000 treating the entire share capital as non-genuine is indicative of non-application of mind on the part of the assessing officer inasmuch as books of account maintained by the assessed have been found to be correct and accepted by the assessing officer in the regular assessments for the various assessment years as well as the impugned block assessment whereas with regard to the entire share capital an arbitrary addition has been made without proper appreciation of facts of the case. Without pointing out any defects and discrepancies in the books, there is no logic with the assessing officer to draw the conclusion that the entire share capital right since the incorporation of the assessed-company from 1992 onwards, represents income from undisclosed sources. According to the learned counsel, the assessing officer has accepted the accounts as correct and no evidence has been found even during the search operations to impeach the veracity of accounts, therefore, the addition treating the entire share capital as non-genuine does not stand to reason. In support of his contention, learned counsel placed reliance on the decision of Supreme Court in CIT v. P.K. Noorjahan (1999) 237 ITR 570 (SC). Concluding his arguments, learned counsel reiterated that since the issue is squarely covered by the earlier decisions of the Tribunal in the case of Alok Aggarwal as well as Makhni & Tyagi (P) Ltd., the impugned addition of Rs. 2,27,15,000 deserves to be deleted.

14. Learned Departmental Representative, on the other hand, rested content by placing reliance on the impugned order of the assessing officer and referred to the decision of Delhi High Court in the case of CIT v. Sophia Investment & Finance Ltd. (1994) 205 ITR 98 (Del)(FB).

15. We have carefully considered the rival submissions made by the learned representatives on both sides and also gone through the compilation of papers filed by the learned counsel as well as string of judicial authorities cited before us. At the very outset, we cannot help observing that impugned block assessment order made by the assessing officer does not reflect application of mind on the part of the assessing officer while proceeding to include the entire share capital of Rs. 2,27,15,000 as undisclosed income of the assessed-company for the block period. assessed- company is duly incorporated under the Companies Act as a public limited company and existence of corporate entity and genuineness of the company is not disputed by the revenue. The company is closely held and obviously promoters of the company and its directors have subscribed share capital in addition to the subscription made by the public at large. Complete list of the shareholders with their addresses has been filed before us at pp. 141 to 149 of the paper book. From this list, we find that shareholders include limited companies, namely, M/s Akarti Media (P) Ltd. 20,000 shares assessed with Co. Ward 1(I), New Delhi and Vardhman Leasing & Services Ltd. 1,50,000 shares assessed with Special Range 16, New Delhi. Such shareholdings subscribed by the limited companies as well as the directors and their family members who are existing income-tax assesseds have also been treated as undisclosed income of the assessed- company. Obviously, the approach and attitude adopted by the assessing officer is contrary to logic and reason. A limited company is an artificial legal person being run and controlled by the board of directors. Now, the very hypothesis whereby the entire share capital, subscribed in the various assessment years is treated as undisclosed income of the company runs contrary to prudent reasoning particularly when the books of account of the company and the business transactions concerning dealings in share as well as manufacturing of agricultural products recorded and reflected in the books in the various assessment years during the block period have been accepted by the assessing officer as correct and true. On going through the balance sheets of the assessed-company for the various assessment years falling in the block period, we find that 'there are substantial credits and loans as reflected in the books. For example, in the balance sheet as on 31-3-1996, placed in the paper book at p. 69 subscribed share capital is reflected at Rs. 2,27,15,000 and loan funds are reflected at Rs. 3,88,44,434, whereas the assessing officer treats the entire share capital as undisclosed income of the assessed-company. The loan funds have been accepted as genuine while making the regular assessment for assessment year 1996-97 as well as the impugned block assessment. The correctness of accounts for various assessment years as well as the profits reflected in the books have not been questioned or challenged by the revenue authorities at any stage, i.e., prior to the search proceedings as well as in the block assessment covering the block period. It is relevant to note that additional share capital of Rs. 35,50,000 appearing in assessment year 1997-98 and Rs. 2.27 crores appearing in assessment year 1998-99 have been accepted as genuine by the assessing officer after scrutiny during regular assessments for these years made after the search operations, as against the entire share capital of section 2,27,15,000 appearing during the block period has been held to be undisclosed income.

16. The basis for treating the entire share capital as undisclosed income, as cited by the assessing officer in the impugned block assessment, is the seized material containing share application register, shareholding register as well as various other documents like confirmations of shareholding signed by the shareholders of the assessed-company as found at the premises of Shri Alok Aggarwal, a practicing chartered accountant. The relevant extract from the impugned assessment order indicating the seizure of the various types of documents from the premises of Shri Alok Aggarwal as per p. 3 of the block assessment order has already been reproduced hereinbefore. This appears to be the sole basis adopted by the assessing officer to treat the entire share capital of Rs.2,27,15,000 as undisclosed income. Obviously, the assessing officer has been shifting his stand with regard to the addition on account of share capital. Firstly, the share capital was added in the block assessment order in the case of Shri Alok Aggarwal. This assessment was made on substantive basis. The Tribunal, however, set aside the said assessment with the direction that fresh assessment be made after allowing proper opportunity to the assessed and the facts and material collected during the search operations as well as the block assessment proceedings should be confronted to the assessed. AO, however, made a fresh assessment merely repeating the additions with the only difference that share capital, inter alia, of the assessed- company was added on protective basis. Such additions have been deleted by the Tribunal vide its order dated 14-2-2003, a copy of which has been filed before us by the learned counsel. In the said order, the Tribunal has recorded a finding that the share capital cannot be treated as non-genuine on the basis of facts and material seized during the search operations. We find that the findings recorded by the Tribunal in the said order in IT(SS)A No. 83/Del/2001, dated 14-2-2003, heavily relied upon by the learned counsel, squarely cover the issue arising in the present appeal against the revenue and the impugned addition is liable to be deleted. The issue also stands covered squarely in favor of the assessed by the order of the Tribunal in the case of the allied company, namely, Makhni & Tyagi (P) Ltd. (supra), whereby similar addition has been deleted.

17. In the backdrop of the aforesaid facts, we feel that there is no cogent evidence on record in support of the finding of the assessing officer that share capital of the assessed-company, duly reflected in the books of account, represents the undisclosed income for the block period. If any documents concerning the shareholdings like copies of cheques by which the share application money has been received from the shareholders or the signed blank receipt for sale of such shares, etc., have been found at the premises of Shri Alok Aggarwal, this cannot be a ground for treating the shareholding as Benami capital of the assessed-company. The said Shri Alok Aggarwal has duly explained the circumstances under which the said documents and papers were found at his premises and the explanation has been found to be tenable by the Tribunal vide the aforementioned appellate orders in the cases of Alok Aggarwal (supra) as well as Makhni & Tyagi (P) Ltd. (supra). In these circumstances, there is no occasion for treating such share capital as undisclosed income of the assessed-company.

18. We may refer at this stage to the contention of the learned of the learned counsel that a part of the share capital has been assessed by the assessing officer in the regular assessments and the same cannot, therefore, be included in the block assessment by virtue of Explanation appended below section 158BA(2). The said Explanation inserted by the Finance (No. 2) Act, 1998, with effect from, 1-7-1995, reads as under :

"(b) the total undisclosed income relating to the block. period shall not include the income assessed in any regular assessment as income of such block period. "

Explanation (b), as reproduced above, in explicit and unequivocal terms excludes from the purview of undisclosed income relating to the block period the income assessed in any regular assessment.

In the instant case, we find that for assessment year 1996-97, the assessed surrendered the accretion of the share capital to the extent of Rs. 1,12,25,000 in the return of income filed on 30-11-1996, i.e., after the search period. The said amount has been included in the regular assessment made by the assessing officer under section 143(3) on 29-5-1998. Similarly, for assessment year 1994-95, we find that a sum of Rs. 2 lacs has been assessed by the assessing officer on account of contribution of share capital in the name of MKN Portfolio (P) Ltd. This assessment has been made under section 143(3) on 30-10-1996, as per the assessment order placed in the paper book at pp. 90 to 96. We are inclined to accept the contention of the learned counsel that by virtue of Explanation to section 158BA(2), the action of the assessing officer in making double addition is in any case contrary to law as well as accepted principles of tax jurisprudence.

19. We may look at the entire issue from another angle, namely, the impact of provisions of section 68 in the context of block assessment proceedings. The assessing officer has taken resort to the provisions of section 68 and held that the assessed failed to discharge the onus of proving the genuineness of' share capital as per the provisions of section 68. We feel that the question of onus cast under section 68 on a company for proving the genuineness of the share capital has been concluded by the two decisions of jurisdictional High Court, i.e., Delhi High Court in the case of Steller Investments (supra) and Sophia Finance & Investments Ltd. (supra). Steller Investrnents (supra) has been endorsed by the Honble Supreme Court in CIT v. Steller Investments (supra). The common thread which runs through these two decisions is the enunciation of the Principle that once the identity of the shareholders who have subscribed to the share capital is established, the onus which lay on the company under section 68 would stand discharged. It has been observed by Delhi High Court in Sophia Finance Ltd.. (supra) at p. 105, "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, possibly, no further enquiry need be made. But if the Income Tax Officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the, name of non-existing persons." Applying the aforesaid settled legal position to the facts of the instant case, we find that the impugned addition made by the assessing officer is in any case liable to be deleted in the facts of the instant case. It is not disputed by the revenue that the identity of the shareholders is established and they have filed confirmation letters which have, in fact, been found at the premises of Shri Alok Aggarwal, as mentioned by the assessing officer in the assessment order itself. On this short ground alone, the ratio of Delhi High Court decisions clinches the issue against the revenue. The addition of the share capital made by the assessing officer in the block assessment is, therefore, liable to be deleted.

20. For the aforesaid reasons, the addition of Rs. 2,27,15,000 made on account of share capital is deleted.

21. In the result, the appeal is allowed as above.