M/S Power Drugs Ltd v. Commissioner Of Income Tax And Another

ITA No. 194 of 2011 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH M/s Power Drugs Ltd. Versus Commissioner of Income Tax and another ITA No. 194 of 2011 Date of Decision: 14.7.2011 ....Appellant. ...Respondents. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Akshay Bhan, Advocate for the appellant. AJAY KUMAR MITTAL, J. 1.This appeal has been preferred by the assessee underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstthe order dated 22.10.2010 passed by the Income Tax AppellateTribunal, Chandigarh Bench 'A', Chandigarh (hereinafter referred to as“the Tribunal”) in ITA No. 706/Chd/2009, relating to the assessmentyear 2005-06, claiming the following substantial questions of law:- “i)Whether in facts and circumstances of the case, theaction of the authorities below in treating thesubscription of the share capital by alleged bogusshareholder as undisclosed income of the assesseeis legally sustainable in the eyes of law?action of the authorities below in treating thesubscription of the share capital by alleged bogusshareholder as undisclosed income of the assesseeis legally sustainable in the eyes of law? ii) Whether in facts and circumstances of the case, theaction of the authorities below in ignoring the law laiddown by the Hon'ble Supreme Court in the case ofCIT v. Steller Investment Ltd. reported as [2001]251 ITR 263 (SC) is legally sustainable in the eyes oflaw? iii) Whether in the facts and circumstances of the case,the action of the authorities below is result of an errorin interpreting the decision of the Hon'ble Apex Courtin the case of Lovely Exports (Supra)? iv)Whether in facts and circumstances of the case, theauthorities below have erred in applying the provisoto Section 36(1)(iii) of the Act when the disputedamount was subject matter of litigation? v) Whether in facts and circumstances of the case, theimpugned orders Annexures A-1 to A-3 passed bythe authorities below, are legally sustainable in theeyes of law?” 2.Briefly stated, the facts necessary for adjudication asnarrated in the appeal are that the assessee filed its return for theassessment year 2005-06 on 31.10.2005 declaring an income ofRs.34,58,867/- which was reduced to nil by adjusting brought forwardlosses of the earlier years. The return of the assessee was processedunder Section 143(1) of the Act on 6.3.2006 and demand of Rs.9900/-was raised on account of interest under Sections 234B and 234C of theAct. The case of the assessee was selected under compulsory scrutiny v) Whether in facts and circumstances of the case, theimpugned orders Annexures A-1 to A-3 passed bythe authorities below, are legally sustainable in theeyes of law?” 2.Briefly stated, the facts necessary for adjudication asnarrated in the appeal are that the assessee filed its return for theassessment year 2005-06 on 31.10.2005 declaring an income ofRs.34,58,867/- which was reduced to nil by adjusting brought forwardlosses of the earlier years. The return of the assessee was processedunder Section 143(1) of the Act on 6.3.2006 and demand of Rs.9900/-was raised on account of interest under Sections 234B and 234C of theAct. The case of the assessee was selected under compulsory scrutiny as per CBDT's guidelines by issuing statutory notice under Section 143(2) of the Act on 31.5.2006. During the year in question, the assesseehad received Rs.42,78,756/- as share application money throughprivate persons. During enquiry, the assessee furnished the names ofpersons, their addresses and share application forms which had thesignatures or thumb impressions. The Assessing Officer held that theassessee had failed to discharge primary onus to establish the identity,credit worthiness and genuineness of the transactions. Further, duringthe year in question, the assessee had advanced Rs.25 lacs each toMr. Ashok Anand and Mrs. Raj Rani Anand. The Assessing Officerwhile relying upon the judgment of this Court in M/s AbhishekIndustries Ltd. v. CIT, [2006] 286 ITR 1 (P&H), held that the interestrelatable to advances of such amount was disallowable. The reliancewas also placed on Section 36(1)(iii) of the Act. Accordingly, theAssessing Officer vide order dated 28.12.2007 disallowed a sum ofRs.6 lacs on this account. Feeling aggrieved, the assessee filed anappeal before the Commissioner of Income Tax (Appeals) [in short “theCIT(A)”]. The CIT (A) vide order dated 23.4.2009 held that theassessee had not discharged his primary onus of establishing identity,credit worthiness and genuineness of transaction under Section 68 ofthe Act. Further, the CIT(A) held that the proviso to Section 36(1)(iii)was applicable and no allowance could be given till such asset hadbeen put to use. Still feeling dissatisfied, the assessee approached theTribunal. The Tribunal vide order dated 22.10.2010 rejected both thegrounds of the assessee which gave rise to the assessee to approachthis Court by way of instant appeal. 3.We have heard learned counsel for the appellant. 4.Learned counsel for the assessee submitted that theTribunal had erred in treating the income on account of shareapplication money to be undisclosed income of the assessee.According to him, the department could have proceeded against theindividuals in whose name the share application money was deposited.He relied upon the ratio laid down by the Hon'ble Supreme Court inCommissioner of Income Tax v. Loverly Exports (P) Ltd. [2008] 216CTR (SC) 195 and the judgment of the Delhi High Court in ITA No.1469 of 2010,Commissioner of Income Tax v. New Age Infosys Pvt.Ltd. decided on 27.9.2010. Learned counsel also urged that thedisallowance of Rs.6,00,000/- on account of interest relatable toadvances to Mr. Ashok Anand and Mrs. Raj Rani Anand under Section36(1)(iii) of the Act was unsustainable. 5.We do not find any substance in the submission made bylearned counsel for the assessee. The Tribunal while upholding thatthe amount of Rs.42,78,756/- received by the assessee as shareapplication money was infact undisclosed income of the assessee hadadjudicated the said issue against the assessee with the followingobservations:- “7.The assessee is a unlisted company and hadnot made any public issue. During the year underconsideration, the assessee had receivedRs.42,78,756/- as share application money throughprivate placing. The assessee was asked to furnishthe details thereof. In reply the assessee furnished 5.We do not find any substance in the submission made bylearned counsel for the assessee. The Tribunal while upholding thatthe amount of Rs.42,78,756/- received by the assessee as shareapplication money was infact undisclosed income of the assessee hadadjudicated the said issue against the assessee with the followingobservations:- “7.The assessee is a unlisted company and hadnot made any public issue. During the year underconsideration, the assessee had receivedRs.42,78,756/- as share application money throughprivate placing. The assessee was asked to furnishthe details thereof. In reply the assessee furnished the names of persons as per Annexure II wheremostly the amounts were shown to have beenreceived from some names of village and P.O.Alewa, Jind, Haryana as noted by the AssessingOfficer. The Assessing Officer was of the view thatthe assessee had failed to discharge primary onus toestablish the identity, credit worthiness andgenuineness of the transactions. The AssessingOfficer observed that the assessee had notdischarged the primary onus and on perusal of theinformation noted as under:- i.Names only ii.Incomplete address in view only village andPost Office, Alewa.Post Office, Alewa. iii.Share application forms which do not bearphotographs of these persons.photographs of these persons. iv.Some of applications just bear thumbimpression.impression. v.None of them is an income tax assessee anddo not even have PAN except Ms. Rekha Goelwho has allegedly advanced an amount ofRs.2.00 lakhs in cash. The most importantfact to be noted is that huge amounts in lakhsof rupees have been deposited in cash by non-assessees having no PAN, without anyphotographs and without any evidence regarding their credit worthiness to advancesuch large amount in cash. 8.The Assessing Officer invoked the provisionsof Section 68 of IT Act and made the addition ofRs.42,78,756/-. 9.Before the CIT(A) the stand of the assesseewas that under the Company's Act the assessee canreceive share application money either in cash orcheque. It was further submitted by the Ld. Counselfor the assessee before the CIT(A) that theapplicants did not possess any PAN and the copiesof share application forms were furnished before theAssessing Officer, which had requisite details of thesaid person. It was further pointed out by the Ld.Counsel for the assessee that in view of the ratio laiddown by the Hon'ble Supreme Court in CIT v. LovelyExport Pvt. Ltd. [(2008) 216 CTR (SC) 195] eventhough the share application money was receivedfrom alleged bogus share holders whose nameswere given, no addition can be made in the hands ofthe assessee company and action, if any, is to betaken only in the case of the share applicants. TheCIT(A) held that the assessee had not dischargedhis primary onus of establishing identity, creditworthiness and genuineness of transaction u/s 68 ofIT Act. Moreover, entire sum was received in cash where genuineness of transaction is always in doubt.The CIT(A) further held that the assessee had failedto file the confirmation from the creditors and onusnot being discharged, the addition merits to beupheld. The Ld. A.R. for the assessee drew ourattention to the share application forms receivedfrom 28 persons placed at pages 7 to 34 of thepaper book in which the requisite details of eachpersons was given. The Ld. D.R. for the revenueplaced reliance on the order of CIT(A) and pointedout that the amounts in question were received incash and the identity of the share holders not havingbeen established, the addition merits to be upheld. where genuineness of transaction is always in doubt.The CIT(A) further held that the assessee had failedto file the confirmation from the creditors and onusnot being discharged, the addition merits to beupheld. The Ld. A.R. for the assessee drew ourattention to the share application forms receivedfrom 28 persons placed at pages 7 to 34 of thepaper book in which the requisite details of eachpersons was given. The Ld. D.R. for the revenueplaced reliance on the order of CIT(A) and pointedout that the amounts in question were received incash and the identity of the share holders not havingbeen established, the addition merits to be upheld. 10.We have heard the rival submissions andperused the record. The assessee company duringthe year under consideration had raised shareapplication of money of Rs.42,78,756/-. The entireshare application money was received in cash andas per the claim of the assessee the sum wasreceived from 28 persons. The assessee hadfurnished on record the copies of share applicationforms submitted for allocation of shares, copies ofwhich are placed at pages 7 to 34 of the paper book.The perusal of said share application forms revealedthe assessee to have furnished the names, father'sname and addresses of the parties which were found to be incomplete by the Assessing Officer/CIT(A). Insome cases even the address were found to beincomplete. 11.The issue involved in the present ground cameup for consideration before the Hon'ble Apex Courtin CIT Vs. Lovely Exports (P) Ltd. (supra). The HighCourt while deciding the issue as reported in LovelyExports (P) Ltd. vs. CIT 299 ITR 268 was of the viewthat in the context of section 68 of the Income TaxAct, the Assessing Officer has to prima facieestablish (i) the identity of the creditor ii) thegenuineness of the transactions, whether transmittedthrough banking indisputable channels iii) thecreditworthiness or financial strength of the creditor.The Court further observed that if the relevant detailsof the address or PAN identity of the creditor/subscriber were furnished along with other detailsi.e. share holder register, share application form,share transfer register etc. It would constituteacceptable proof or acceptable explanation by theassessee. The onus of the assessee therein washeld to stand discharged where the identity of thecreditor/subscriber was proved and it was furtherheld that the Assessing Officer was duty bound toinvestigate the creditworthiness of the creditor/subscriber and the genuineness of the transactions and the veracity of the repudiation of the creditor/subscriber. The Special Leave Petition filed by theRevenue against the said decision of the Court wasdismissed by the Supreme Court vide its decisionreported in (2008) 216 CTR SC 195, which reads asunder:- “Can the amount of share money be regardedas undisclosed income under section 68 of theIncome Tax Act? We find no in Special LeavePetition for the simple reason that if the shareapplication money is received by the assesseecompany from alleged bogus shareholders,whose names are given to the AssessingOfficer, then the department is free to proceedto reopen their individual assessments inaccordance with law. Hence, no infirmity isfound with the impugned judgment.” 12.The Hon'ble Delhi High Court in CIT v. WinstralPetro Chemicals Pvt. Ltd. (ITA No. 592/2010) date ofjudgment 12.5.2010 after relying on the ratio laiddown by the Apex Court in Lovely Exports (P) Ltd.(supra) observed that where the identity of thesubscriber has been established by way of differentproofs filed in this regard and if the Assessing Officerentertains any doubt about the genuineness of thedocuments, the same could have been verified by 12.The Hon'ble Delhi High Court in CIT v. WinstralPetro Chemicals Pvt. Ltd. (ITA No. 592/2010) date ofjudgment 12.5.2010 after relying on the ratio laiddown by the Apex Court in Lovely Exports (P) Ltd.(supra) observed that where the identity of thesubscriber has been established by way of differentproofs filed in this regard and if the Assessing Officerentertains any doubt about the genuineness of thedocuments, the same could have been verified by him from the records available with the authorities.From the above said, it transpires that the onus isupon the assessee to establish the identity of thesubscriber in relation to the share application moneyreceived. Where the assessee fails to establish theidentity of the subscriber, the onus cast upon theassessee to prove that the credits are genuine doesnot stand discharged. The Assessing Officer duringthe course of assessment proceedings, on theperusal of the information furnished by the assesseefound the assessee to have only disclosed thenames of the persons and incomplete addresseswere bearing only thumb impression. The total shareapplication money was received in cash and notthrough banking channels and none of the saidpersons were income tax assessees nor had anyPAN numbers. In the facts of the present case theassessee has failed to prove the identity of thesubscriber and applying the ratio laid down in thecase of Lovely Exports (P) Ltd. (supra), we are inconformity with the order of CIT(A) and uphold theaddition of Rs.42,78,756/-.” 6.The assessee was unable to establish the identity, creditworthiness and the genuineness of the transaction so as to escape fromthe provisions of Section 68 of the Act. Whether an addition is to bemade in the hands of the company or individual assessee in such circumstances depends upon the facts of each case. The primary onuslies upon the assessee to establish that the assessee is not liable foraddition under Section 68 of the Act as the amount in fact belongs tothe persons who had applied and submitted share application money.The assessee having failed to discharge such onus in the present case,the Tribunal had rightly upheld the additions in the hands of thecompany. 7.Adverting to the second issue relating to disallowance ofinterest under proviso to Section 36(1)(iii) of the Act on the ground thatthe assessee had paid the amount of interest relating to expansion of itsbusiness prior to the utilization of the machinery, the Tribunal hadcategorically held that the assessee had borrowed the loans which wereutilized for making the advances for acquisition of new asset. Theamount of interest was attributable to the capital borrowed foracquisition of new asset for expansion of the existing business. Thefinding recorded by the Tribunal in this respect would be advantageousto be noticed here which reads thus:- “On hearing the rival contentions of the parties, wefind that it is an admitted position that the amountwas advanced for acquisition of new asset which wasclaimed to be for the furtherance of the businessactivity of the assessee before us. Admittedly, theamount was not advanced as a loan and we find nomerit in the orders of authorities below in applying theratio laid down by the Hon'ble Punjab & HaryanaHigh Court in the case of Abhishek Industries (supra). However, admittedly the assessee hadborrowed the loans which were utilized for makingthe said advances. We are in conformity with theorders of authorities below that the proviso underSection 36(1)(iii) of the Act is squarely applicable tothe facts of the present case. The amount of interestattributable to the capital borrowed for acquisition ofnew asset for expansion of the existing businesscannot be allowed as deduction for the periodbeginning from the date on which the capital wasborrowed till the date of the asset being put to use.Accordingly we sustain the disallowance of Rs.6 lacsand dismiss the ground No.4 raised by theassessee.” (supra). However, admittedly the assessee hadborrowed the loans which were utilized for makingthe said advances. We are in conformity with theorders of authorities below that the proviso underSection 36(1)(iii) of the Act is squarely applicable tothe facts of the present case. The amount of interestattributable to the capital borrowed for acquisition ofnew asset for expansion of the existing businesscannot be allowed as deduction for the periodbeginning from the date on which the capital wasborrowed till the date of the asset being put to use.Accordingly we sustain the disallowance of Rs.6 lacsand dismiss the ground No.4 raised by theassessee.” 8.No perversity could be pointed out in the aforesaid findingsrecorded by the Tribunal and this Court is of the opinion that nosubstantial question of law arises in this appeal. The appeal isaccordingly dismissed. (AJAY KUMAR MITTAL) JUDGE July 14, 2011gbs (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE