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Pragati Financial Management Pvt. Ltd vs. CIT (Calcutta High Court)
April, 29th 2017

Bogus share capital: Mere fact that payment was received by cheque or that the applicants were companies borne on the file of the Registrar of Companies does not prove that the transaction was genuine. Even under the unamended s. 68, the onus is on the assessee prove the creditworthiness of the subscribers. Argument that the amendment to s. 68 is not retrospective is not required to be considered

(i) The direction for inquiry, as contained in the order of the C.I.T., is essentially a step towards charging the receipts reflected as share capital issued at premium to income tax as income of the assessee of that previous year in the event the assessing officer remained unsatisfied with explanation of the assessee given after conducting the inquiry in the manner provided in the order of the C.I.T. The assessee preferred an appeal before the Income Tax Appellate Tribunal against this order of the Commissioner issued under Section 263 of the Act. It was contended before the Tribunal that the order of the assessing officer was neither erroneous nor prejudicial to the interest of the Revenue, and sufficient inquiry was made by the assessing officer. The Tribunal dealt with several appeals pertaining to the assessment years 2008–09 and 2009–10 relating to different assessees and the appeal of Pragati was dismissed by a common order passed on 4th November, 2015. Orders in respect of other appellants were passed on different dates, but as we have already observed, reasoning in all the orders of the Tribunal has been substantially the same. The Tribunal, while dismissing the appeals followed an earlier order by which a large number of cases on similar issues were dismissed. The lead case on which reliance was placed by the Tribunal was its own decision in the case of Subhalakshmi Vanijya Pvt. Ltd. Vs. C.I.T. (I.T.A No.1104/Kol/2014), which was decided on 30th July 2015, pertaining to the assessment year 2009–10. In the case of Subhalakshmi (supra), the Tribunal examined the question as to whether such an inquiry was permissible or not. While addressing this question, the Tribunal examined as to whether the assessing officer could examine genuineness of transactions of receipt of share capital with premium or not. If such a course was permissible, and upon completion of the inquiry the assessee failed to satisfy the assessing officer on the identity and capacity of the subscribers and genuineness of transactions, then, the Tribunal opined, addition under Section 68 of the Act would have been called for. That would be the ultimate outcome of the inquiry directed by the C.I.T., provided of course, the assessing officer remained unsatisfied with the explanation furnished by the assessees. Section 68 of the Act permits adding the sum credited to the income of an assessee in situations specified under that provision.

(ii) A Coordinate Bench of this Court in dealing with an almost identically worded order of the C.I.T. in the case of Rajmandir Estates Private Limited Vs. Principal Commissioner of Income Tax, Kolkata – III, Kolkata, [G.A No.509 of 2016 with I.T.A.T No.113 of 2016] found such order to be sustainable in law. In the judgment, Their Lordships construed the provisions of section 68 as it was before the aforesaid amendment being the law which prevailed in the relevant previous year in that proceeding, and held, inter alia:-

“We are unable to accept the submission that any further investigation is futile because the money was received on capital account. The Special Bench in the case of Sophia Finance Ltd. (supra) opined that “the use of the words “any sum found credited in the books” in Section 68 indicates that the said section is very widely worded and an Income-tax Officer is not precluded from making an enquiry as to the true nature and source thereof even if the same is credited as receipt of share application money. Mere fact that the payment was received by cheque or that the applicants were companies, borne on the file of Registrar of Companies were held to be neutral facts and did not prove that the transaction was genuine as was held in the case of CIT –Vs– Nova Promoters and Finlease (P) Ltd. (supra). Similar views were expressed by this Court in the case of CIT –Vs– Precision Finance Pvt. Ltd. (supra). We need not decide in this case as to whether the proviso to Section 68 of the Income Tax Act is retrospective in nature. To that extent the question is kept open. We may however point out that the Special Bench of Delhi High Court in the case of Sophia Finance Ltd. (supra) held that “the ITO may even be justified in trying to ascertain the source of depositor”. Therefore, the submission that the source of source is not a relevant enquiry does not appear to be correct. We find no substance in the submission that the exercise of power under Section 263 by the Commissioner was an act of reactivating stale issues.”

(iii) This judgment was carried up in appeal by the assessee before the Hon’ble Supreme Court by filing a petition for special leave to appeal (Petition(s) for Special Leave to Appeal (c) … cc No (s) 22566-22567/2016). On 9th January, 2017, the Hon’ble Supreme Court was pleased to dismiss the special leave petition finding no reason to entertain the same. A copy of the order of the Hon’ble Supreme Court has been made available to us by Mr. Nizamuddin, learned counsel representing the Revenue.

(iv) In that judgment, the Coordinate Bench had referred to particulars of the assessee’s account in detail. Reference was made specifically to its subsisting share capital, quantum rise in share capital and reserve and surplus on issue of share capital with high premium during the relevant previous year. In this judgment, we do not consider it necessary either to reproduce the particulars of accounts of individual assessees or to refer to the manner in which the capital receipts were realised. The factual background of these cases are more or less similar to the facts involved in the case of Rajmandir Estates Private Ltd. (supra), and learned counsel for the parties have also confined their submissions to points of law only. The capital receipts in respect of which inquires have been ordered by the C.I.T. have similar features, being fresh share capital issued at high premium. Mr. Majumdar, however, drew his strength to urge the point that it was only after the aforesaid amendments such inquiries would have relevance. He sought to take cue from the observation of the Coordinate Bench that the question as to whether proviso to Section 68 of Income Tax Act is retrospective in nature or not was being kept open. He also cited the judgment of the Hon’ble Supreme Court in the case of Sneh Vs. Commissioner of Customs [(2006)7 SCC 714] to contend that a judgment is the authority on the proposition which it decides and not what can logically be deduced from, and sought to distinguish the case of Rajmandir Estates Pvt. Ltd. (supra) on that basis. Submission of the appellants is that the points of law urged in these appeals were not raised before the Coordinate Bench. Main argument of the appellants before us has been that the amendment to Section 68 does not have retrospective operation. According to the appellants, if it is found that the amended provisions of Section 68 of the Act do not have retrospective operation, then having regard to what has been held by the Tribunal in the case of Subhalakshmi Vanija Pvt. Ltd. (supra), the inquiry, as directed would be impermissible.

(v) We have already observed that the judgment in the case of Rajmandir Estates Private Ltd. (supra) was delivered considering the unamended provision of Section 68 of the Act. In the case of the assessees before us, there is no differing feature so far as applicability of the said statutory provision is concerned, even though the Tribunal in Subhalakshmi Vanijya Pvt. Ltd. (supra) had held that the provisos to Section 68 of the Act are retrospective in their operation, and delivered the decision against the assessee in that case that reasoning. In the appeal of Rajmandir Estates Private Ltd. (supra), the Coordinate Bench did not consider it necessary to examine the question of retroactivity of the aforesaid provision. The Coordinate Bench found the order of the C.I.T. to be valid examining the order applying the unamended provision of Section 68 of the Act only. We do not find any other distinguishing element in these appeals which would require addressing the question as to whether the amendment to Section 68 of the Act was retrospective in operation or not. Neither do we need to address the issue that if the inquiries, as directed, revealed that share capital infused were actually unaccounted money, whether the same could be taxed in accordance with Section 56(2) (vii b) or not. The ratio of the Constitution Bench decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax Vs. Vatika Township Pvt. Ltd. [(2015) 1 SCC 1] does not apply in the legal context in which we are deciding these appeals. It is not necessary in these appeals to deal with the question of retroactivity of the aforesaid provisions, for which that authority was cited.


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