Delhi High Court

Mefcom Agro Industries Ltd. vs Dy. Cit on 25 November, 2003

Equivalent citations: (2004) 90 TTJ Del 246

ORDER

BY THE BENCH:

This appeal by the assessed is directed against the order of the Commissioner (Appeals) on various grounds but all grounds relate to an addition of Rs. 7.10 lakhs made under section 68 of the Income Tax Act as an income from undisclosed sources.

2. The facts borne out from the record are that the original assessment under section 143(3) was completed. Subsequently, the Commissioner set aside the order after having invoked the provisions of section 263 of the Income Tax Act and directed the assessing officer to reframe the assessment after making proper inquiry in respect of share applications received by the assessed. On inquiry, it was noticed that during the year various sums aggregating to Rs. 1.07 crores were found credited in the books of accounts of the assessed. When the assessed was asked about such credits, it was stated that these credits represented share application money received from eight companies. When the assessed was asked to explain and justify the genuineness of creditor companies, it was stated that the assessed raised share capital by way of issue of 15 lakhs equity shares of Rs. 10 each. Out of this Rs. 150 lakhs, the promoters' contribution was Rs. 60 lakhs and the balance amount was raised by an issue of shares to public. The aforesaid 8 companies have applied for Rs. 1.60 lakhs shares out of public quota and remitted Rs. 8 lakhs to the assessed. In order to prove the facts, the assessed filed the photocopies of application forms of these companies. On examination, the assessing officer noticed that all the 8 companies are based in Muzaffarnagar (UP) and a person named S.L. Garg has signed applications for 5 companies. The address of the 3 companies was the same. The application forms have been deposited with the Bank of India, Parliament Street, New Delhi, on 24-4-1984, after the close of the issue as the public issue was opened on 21-2-1984 and was closed on 24-2-1984. No acknowledgement receipt was given to these eight companies. Some of the applications were incomplete inasmuch as the occupation of the applicant was not mentioned. The assessing officer further noticed that all these 8 companies have denied receiving any shares of the assessed-company and this fact is evident from the copies of legal notice dated 19-2-1987, to JHV Investment and Consultancy Services (P) Ltd. JICS), issued by Mr. N.C. Gupta, advocate. On the basis of this evidence, the assessing officer doubted the genuineness of the transaction and he made investigation. The summons under section 131 were issued to all these 8 companies but the same were not complied with. However, there was compliance in writing by one company but that company did not produce any evidence as the books of accounts were stated to be with the auditors. The assessing officer made inquiries through the assessing officer, Meerut, with whom all the applicant companies were being assessed. The assessing officer examined the material collected in inquiry and observed as under :

"1. Search and seizure operations were conducted by the IT department, under section 132 of the Act, on 17-6-1985, at the premises of all the companies at Muzaffarnagar, including the residence of their directors and auditors.

2. Various incriminating documents were seized from their premises which revealed that Mr. S.K. Garg and one Mr. M. Mighlani were the men behind all these companies which were floated for the only purpose of name lending and providing for hawala entries.

3. In respect of M/s. U.P. Fasteners (P) Ltd., various incriminating documents were seized at the Delhi premises of M/s. S.K. Garg & Co. Thereafter, various enquiries were made from a large number of persons. The assessing officer of this company, after recording detailed facts and evidences, held in the assessment order for assessment year 1984-85 and then in assessment year 1987-88, that this company was engaged in business of providing hawala entries only and it did not have any genuine business of investment. Accordingly, the share capital shown in the hands of assessed-company was treated as bogus. In the assessment order dated 23-1-1990, for assessment year 1987-88, the Assistant Commissioner (Central Circle, Meerut) observed as under :

'It has been admitted by the director of the assessed-company that no share certificates as shown in the balance sheet of the company were ever possessed by the assessed-company or its director nor they were presently available with the assessed-company. It was also stated that no direct dealing of sale and purchase of shares was made by the assessed-company. All the investments were made through Mr. M.M. Mighlani, a middle man, to whom no payment has been stated to have been made. No reasons for not possessing the share certificates has been given by the director of the company. This is further important to note that this is a case of the investment/finance companies of the Muzaffarnagar on which search and seizure operations were conducted on 17-6-1985.'

'In support of the above claim no documentary evidence have been filed. Moreover, it has already been held that the assessed-company was not doing any business of investment and in earlier years also, no share certificates, etc., were furnished to prove the fact that the company was actually engaged in share dealings. No satisfactory explanation was, however, given as to why the company sold its shares on such throwaway price. As the assessed-company was not engaged in investment of share, etc., and has been doing hawala transaction which has already been held in earlier years, the loss of Rs. 9,03,792 is disallowed. In fact, the assessed-company must have received commission or premium for providing hawala entries in the form of these investments which have finally been transferred into the hands of real investors at very nominal price.'

The same finding has been made by Assistant Commissioner (Central Circle), Meerut, in her order dated 14-3-1991, for assessment year 1988-89, wherein she observed :

"From the contents of the seized material together with absence of share certificate in the name of company right from beginning added to the fact that its alleged share subscriptions are nothing but bogus. The assessed-company was only engaged in hawala transaction. The real work of the company was to reflect availability of bogus capital with it by way of fictitious share subscriptions and then to make such bogus funds available for being invested by various persons who wished to use their unaccounted monies in the name of assessed-company."

4. In respect of M/s. Financiers and Management Consultants (P) Ltd., observations to the similar effect have been made by the Assistant Commissioner (Inv. Circle), Muzaffarnagar, in assessment year 1984-85 and subsequent years. Mr. S.K. Garg, the director of the company specifically stated that the company did not (and never) possess the share certificates of the companies which are shown as investment of that company in its balance sheet.

The assessment order for assessment year 1984-85 brings out various facts and evidences to hold that various investments made by this company are not genuine as the company did to have any real funds to invest. The only business of the company was to provide hawala entries.

5. Exactly the same findings have been given by the assessing officer in the case of M/s. Haryana Winers (P) Ltd., in assessment year 1984-85, onwards up to assessment year 1988-89. In this case, it is seen that the director of this company, Mr. C.K. Sharma, stated on oath before the assessing officer that he was indulging in hawala activities on the advice and pursuance of Mr. S.K. Garg for which small gains were received by him. It has been specifically stated before the assessing officer that the share certificates in respect of its various alleged investments in different companies were never possessed by that company.

6. Findings to the same effect have been made by the assessing officer in the case of Magnet Trading & Chit Fund (P) Ltd., right from assessment year 1984-85, onwards.

It may be noted that it was stated before the Assistant Commissioner (Inv., Circle), Muzaffarnagar, by Mr. V.K. Gupta, the director of this company, that he was not controlling or managing the affairs of this company, which in fact were being looked after by Mr. S.K. Garg and it was he only who was in complete knowledge of the affairs of the company. It was submitted before the assessing officer that both of the directors of Magnet Trading & Chit Fund (P) Ltd. were, in fact, only Benamis of Mr. S.K. Garg and were signing all the documents as per instructions of Mr. S.K. Garg. They submitted that they never dealt with the affairs of funds of the company and stated that Mr. S.K. Garg and M.M. Mighlani were engaged in such activities of Benamis in the name of various other companies.

7. The same findings have been made by the assessing officer in the case of M/s. Shree Ganesh Chawla (P) Ltd., in respect of all the assessment years, since incorporation of the company. In this case also, the directors admitted before the assessing officer that the company did not process any share certificate in respect of its alleged investment or subscription of share capital of different companies. It has been found that the company did have no funds to invest and did not really invest in share subscription. It was only a "hawala transaction" company.

8. Similar findings and observations have been made by the assessing officer in case of M/s. Alakhnanda Alloys Castings (P) Ltd.

9. Apart from similar observations and findings by the assessing officer in case of M/s. Bijnor Finance Co. (P) Ltd., it may be noted that its director, Sunil Kumar Sharma, deposed on 22-12-1988, before the assessing officer that his company did not have any funds and did not really subscribe to the shares of different companies. He deposed that he simply used to fill up the share application forms of different companies as provided to him by Mr. S.K. Garg, He deposed that he used to receive commission of 1.5 per cent on share application amounts. He has stated that he was made the director in various companies, namely, Bijnor Finance (P) Ltd., M/s. Shree Ganesh Chemicals (P) Ltd. and M/s. Haryana Winers (P) Ltd., etc. by Mr. S.K. Garg, and he conducted the aforesaid business on his instruction and advice.

10. Findings of the assessing officer in the case of Muzaffar Investment Ltd. are similar that they were engaged only in providing hawala entries and did never really acquire any share of any company were run by Mr. S.K. Garg and Mr. M.M. Mighlani through his dummies."

3. On the basis of above observations, the assessing officer has treated this introduction of Rs. 7,10,000 as share capital as unexplained income of the assessed under section 68 of the Income Tax Act because this share application money remained unexplained.

4. The assessed preferred an appeal before the Commissioner (Appeals) with the submission that if the addition at all is called for, it could have been made in the hands of the individual applicants who have made a contribution as share capital with the assessed-company and not in the hands of the assessed. In support of its contention, it has relied upon the judgment of the jurisdictional High Court in the case of CIT v. Stellar Investment Ltd. reported at (1991) 192 ITR 287 (Del). The Commissioner (Appeals) re-examined the issue in the light of material available on record and he observed that actual amount received from these eight companies was Rs. 8 lakhs and not Rs. 7.10 lakhs as mentioned by the assessing officer. He, accordingly, held that if the addition is to be confirmed, it would be Rs. 8 lakhs instead of Rs. 7.10 lakhs. He further observed on merit that the public issue was opened on 21-2-1984, and closed on 24-2-1984, and nothing has been placed before him how the share applications were received in April, 1984 after two months of the close of the issue. The Commissioner (Appeals) further observed that even assuming that under the Companies Act, the assessed could receive the application after the close of the issue and deposit the same with bank subsequently this is why acknowledgements for receipt of share applications were not issued to the eight appellant (sic-applicant) companies yet it is for the assessed to prove the nature and source of credit entries appearing in its books of account. The Commissioner (Appeals) further examined various judicial pronouncements on this issue but was not satisfied with his contention that the assessing officer cannot make an inquiry into the genuineness of the transaction. He further observed that the assessed claims to have allotted the share to eight companies whereas these companies have denied having received any share certificate. He, accordingly, asked the assessed how a demand for balance of Rs. 5 per share was made but no evidence in this regard was filed before him. He further noticed certain facts from the documents that a company, namely, JHV Investment Services (P) Ltd. has requested the assessed-company in November, 1996, to transfer certain shares in its name which stood registered/allotted in the name of these eight companies. Vide its letter dated 28-11-1986, the assessed wrote to JHV that shares cannot be transferred in their name as the signature of the transferer does not tally. On receipt of such letter, M/s. JHV wrote to those companies returning old transfer deeds and requested them to send a fresh transfer deed. Accordingly, UP Fasteners (P) Ltd. and Shri Ganesh Chemicals (P) Ltd., vide their letter dated 18-12-1986, wrote a letter to M/s. JHV enclosing a fresh transfer deed duly signed by them. On scrutiny of the transfer application form, the Commissioner (Appeals) noticed with utter surprise that this form was issued by the Registrar of Companies, Delhi, on 27-11-1987, and these facts were beyond the comprehension of the Commissioner (Appeals) how the form issued by the RoC of Delhi on 27-11-1987, could be enclosed with the letter dated 18-12-1986, i.e., about year before. When these facts were confronted to the assessed, no comments were offered. The Commissioner (Appeals) has also examined other angles of the case. Admittedly, the face value of the share was Rs. 10 each and the assessed had received Rs. 5 per share from the eight companies in this year and in response to query as to when this balance amount of Rs. 5 per share has been received, no comments were offered from the side of the assessed. The Commissioner (Appeals) observed that even assuming the original allottees of the shares, i.e., 8 companies showed the partly paid shares of Rs. 5, then the balance amount of Rs. 5 per share should have come from M/s. JHV and in case the original allottees have not sold these shares, then the balance amount of Rs. 5 per share should have come from these 8 companies. But no amount on account of the shares has been received by the assessed at all. All these facts led the Commissioner (Appeals) to conclude that the assessed has failed to discharge the onus of proving the identity of share applicants and the genuineness of the transaction. He, accordingly, upheld the order of the assessing officer.

5. Aggrieved, the assessed has preferred an appeal before the Tribunal with the submission that the assessed has received the share application money through cheques and later on the shares were allotted to the share applicants. The learned counsel for the assessed has placed heavy reliance upon the judgment of the Apex Court in the case of CIT v. Stellar Investment (2001) 251 ITR 263 (SC) in support of his contention that the revenue authority has no jurisdiction to examine the genuineness of the transaction if the issue is quoted on stock exchange. Learned counsel for the assessed has invited our attention that the share application along with the application money was received through the banking channels and in support of this contention, reliance was placed upon the certificate of the stock exchange according to which allotment of shares under the public issue is considered only on the basis of certificate issued by the bankers to the issue regarding application money received by them under the said public issue. It was also stated through this certificate that the application for allotment of shares on public issue needs to be deposited with the bankers to the issue and the application money for such issue cannot be deposited directly with the company. Since no transaction in this regard was undertaken directly by the assessed with the disputed 8 companies, no inference can be drawn that whatever share application money came from these 8 companies, was an unexplained or undisclosed money of the assessed. He has also invited our attention to the list of share applicants in which the names of these 8 companies are figured in support of his contention that this list was received from the banks and on the basis of this list, shares were allotted to the applicants.

6. The learned counsel for the, assessed further urged that the assessed has placed all relevant evidence to prove the genuineness of the transaction though he was not under any obligation to do so in view of the judgment of the Apex Court in the case of CIT v. Stellar Investment (supra). The onus has shifted to the revenue to bring something on record to falsify the stand of the assessed. Since no concrete evidence has been brought on record by the revenue, the addition made by it deserves to be deleted.

7. The learned Departmental Representative, on the other hand, has placed heavy reliance upon the order of the Commissioner (Appeals) with the submission that the date of deposition of these share applications with bank on 24-4-1984, was not disputed by the assessed. Once it is established that the issue was closed on 24-2-1984, and the share applications were deposited with the bank on 24-4-1984, the onus is upon the assessed to explain how these application forms were accepted by the bank after two months of the close of the issue. It is also for the assessed to explain whether this bank was competent enough to condone the delay in submission of the form and accept the same for referring it to the assessed for issuance of shares. Though the assessed has filed certain list of share applicants along with the details of number of shares applied for but this list does not indicate that it was issued by the banker. If this list is considered to be a proper list, it should be accompanied by some covering letter wherefrom one can infer the date of issuance of this list by the banker and the circumstances under which the share applications were accepted from these 8 companies after 2 months from the close of the issue. This list bears the stamp of the assessed-company on all pages and on the last page, it bears the stamp of assessed as well as the bankers. It is beyond everybody's comprehension as to how this list bears the stamp of Mefcom Agro Industries Ltd., whereas at the relevant point of time, the assessed was known as Shree Mercantile Leasing & Finance Corporation Ltd. Learned Departmental Representative further invited our attention to the orders of the lower authorities with the submission that the lower authorities have brought out substantial material on record to prove that the transactions are not genuine as all companies are bogus and were controlled by Shri S.L. Garg and M. Mighlani. Even before the Tribunal, the assessed could not furnish any evidence how this balance money was paid to the assessed- company before the allotment of shares as at the time of submitting the applications, share applicants were required to pay Rs. 5 per share whereas its cost was quoted at Rs. 10 per share. The queries raised by the lower authorities in their respective orders remained unanswered even before the Tribunal. In these circumstances, the order of the Commissioner (Appeals) deserves to be upheld.

8. Having considered the rival submissions and from a careful perusal of record, we find that the revenue has raised a dispute with regard to the share applications received from 8 companies for allotment of shares worth Rs. 8 lakhs. Admittedly, the issue was opened on 21-2-1984, and was closed on 24-2-1984. It is also not disputed that the share applications from these 8 companies have been deposited with the bank on 24-4-1984, after two months from the close of the issue and later on, shares worth Rs. 8 lakhs were allotted to these eight companies. Now, the question arises whether the share applications were, in fact, received by the banks or by the assessed directly. According to the certificates issued by the Delhi Stock Exchange Association Ltd., it has been clarified that the application for allotment of shares under any public issue needs to be deposited only with the bankers to the issue and the application money for such public issue cannot be deposited directly to the company. It was also clarified through the certificate that the allotment of shares under the public issue is considered only on the basis of certificate issued by the bankers to the issue regarding application money received by them under the said public issue. In the light of this certificate, onus certainly falls upon the assessed to prove whether the share applications were received by the bankers to issue only and the bankers are competent to receive these share applications even after the close of the issue. The onus is also upon the assessed to explain under which rule bankers can accept the share application along with money after the close of the issue and whether they are competent to condone the delay in submission of the application forms? But all these queries remained unanswered by the assessed even up to the stage of the Tribunal. It simply placed heavy reliance upon the judgment of the CIT v. Stellar Investment (supra). We have also carefully examined the certificate issued by the Delhi Stock Exchange Association Ltd., dated 27-6-2003, and a list of share applicants. But from this list, it is not clear when this list was forwarded by the bankers to the assessed for the allotment of shares. Despite a specific direction, the assessed could not file a covering letter of this list, sent by the bankers. In the absence of covering letter, it is not clear whether the share applications from these eight companies were either received by the bankers or by the assessed itself after the close of issue and under what circumstances these shares were allotted to these eight companies, From a careful perusal of the order of the Commissioner (Appeals), it is noticed that the Commissioner (Appeals) has specifically raised a query from the assessed to explain when the remaining payment was made to the assessed before the allotment of shares because at the time of submission of the application form for allotment of shares, applicant was required to deposit Rs. 5 per share whereas the cost per share was quoted at Rs. 10. The assessed could not explain the details of remaining payment during the course of hearing. It has also not been explained by the assessed how the shares were allotted to these eight companies without receiving the full payment.

9. We have also carefully perused the judgments of the CIT v. Stellar Investment (supra) and Hindustan Tea Co. Ltd. v. CIT (2003) 263 ITR 289 (Cal) and CIT v. Ruby Traders & Exporters Ltd. (2003) 263 ITR 300 (Cal), and we find that it has been repeatedly held by the Apex Court and the various High Courts that it is incumbent upon the assessed to produce evidence with regard to the creditworthiness of the individual shareholders and genuineness of investment recorded in books of the assessed- company in their name. In the instant case, the assessing officer has brought clinching material on record to doubt the genuineness of the transaction and by doing so, onus shifted upon the assessed to prove the creditworthiness of the shareholders and the genuineness of the transaction. Despite various opportunities given at different stages, the assessed could not satisfactorily explain the queries raised by the lower authorities. We, however, examined the order of the Commissioner (Appeals) and find that the Commissioner (Appeals) has adjudicated the impugned issue in detail in his order. We, therefore, do not find any infirmity therein. Accordingly, the order of the Commissioner (Appeals) is hereby confirmed.

10. In the result, the appeal of the assessed stands dismissed.