B.N Kirpal, J.:— This is a petition under Section 256(2) of the Income-tax Act, 1961 which has been referred to the Full Bench because the correctness of the observations in the judgment of a Division Bench of this Court in the case of CIT v. Steller Investment Ltd, 192 ITR 297 was doubted.
2. The respondent is a limited company which was incorporated on 27th April, 1983. Its business is of stocks and financing and in the previous year relevant to the assessment year 1985-1986 it showed a loss of Rs. 94,030/- on sale of shares which had been purchased for Rs. 5,42,708/-. It also showed an income of Rs. 1,30,321/- from interest and Rs. 15,348/- from commission and discounting of bills. It filed a return showing a total net income of Rs. 12,433/-. The assessment proceedings commenced on 29th May, 1986 and the return as filed was accepted and the assessment order passed on 11th June, 1986. It was also noted in the assessment order that the company had a declared paid up capital of Rs. 20 lakhs and that necessary details and confirmations had been furnished on record.
3. The Commissioner of Income-tax issued a notice to the assessee to show cause as to why the assessment should not be revised under Section 263 of the Act. After hearing the assessee the Commissioner of Income-tax came to the conclusion that there was lack of enquiry by the Income-tax Officer in the present case and the same was patent from the record. The CIT came to the conclusion, following the decision of a Division Bench of this Court in the case of Gee Vee Enterprise…Petitioner v. Additional Commissioner Of Income Tax…, 99 ITR 375 that there was non-enquiry at the time of assessment and that the said assessment order was erroneous and prejudicial to the interests of the revenue. It was held, while setting aside the order of assessment, that with regard to issuance of the shares it was the duty of the Income-tax Officer to enquire into the genuineness of the share-holders because in a large number of similar cases enquiries had revealed that either the shareholders did not exist at the addressses given or they were mere name lenders. The CIT came to the conclusion that the Income-tax Officer had made no such enquiries to find out whether the “so called share holders were actually in existence or not”.
4. The respondent then filed an appeal to the Tribunal. While observing that in the present case prima facie an enquiry was called for, it was held that the Tribunal was satisfied that the ITO had made the enquiry which he could do under the circumstances. In coming to this conclusion it took note of the fact that the respondent had filed a large number of enclosures alongwith its return including the list of shareholders holding more than 1000 shares. Forms containing the full addresses as well as allotment letters were also furnished and details of the shares issue expenses were placed before the ITO. The Tribunal then took note of the decision of a Bench of the Tribunal in the case of Standard Cylinders (Pvt.) Ltd. 24 ITD 504 in which it was held that the company cannot seek information from the shareholders regarding the source of their investment in those shares. The Tribunal then proceeded to observe that further probe of the company by the Income-tax Officer would be fruitless because the company could not give any further information. The Tribunal had come to the conclusion that the fact that the company was incorporated and the money was received immediately on incorporation would show that even under Section 68 no assessment could be made in the hands of the company. Reliance in this behalf was placed on the decision of the Kerala High Court in the case of CIT v. P.K Noorjehan, 123 ITR 3.
5. After the appeal had been allowed by the Tribunal the petitioner herein filed an application under Section 256(1) seeking reference of the following question to this Court:
“Whether on the facts and in the circumstances of the case, the Tribunal was right in setting aside the order of Commissioner u/s263 of the Income-tax Act by holding that the assessment order of the company cannot be said to be erroneous hence prejudicial to revenue?”
6. Vide order dated 26th April, 1991 the Appellate Tribunal dismissed the application holding that:
“We find that the question as projected by the revenue is not a referable question of law because it does not require opinion on any point of law decided by the Tribunal”.
7. When the petition came up for hearing before the Division Bench of this Court counsel for the assessee relied upon the aforesaid case of Steller Investment Ltd. It was observed in that case that:—
“even if it be assumed that the subscribers to the increased share capital were not genuine, under no circumstance could the amount of share capital be regarded as undisclosed income of the assessee”.
8. Counsel for the petitioner herein, however, submitted before the Division Bench that the provisions of Section 68 of the Income-tax Act, 1961 were not referred to in the case of Steller Investment Ltd (supra) and the said Section would come into play if the Income-tax Officer finds on enquiry that the shareholders were fictitious persons.
9. As the submission of the learned counsel for the petitioner could be construed as running contrary to the ratio of the jugment in Steller Investment Ltd.,'s case, the case was referred to a larger bench and that is how it has come up for consideration before us.
10. On behalf of the petitioner it has been contended that a question of law does arise and on a correct interpretation of section 68 the provisions of the said section get attracted even in cases where the assessee company claims to have received money towards share capital.
11. While contending that the provisions of section 68 can never be attracted, when share capital is issued by a company, it was also contended by the learned counsel for the respondent that the income-tax Tribunal has found as a fact that the Income-tax Officer had made the enquiry which he could under the circumstances and this question of fact has not been challenged and this Court cannot reframe the question permitting the challenge to this conclusion.
12. An application on behalf of M/s Gunja Investment and Trading Ltd. had also been filed in this case seeking to intervene and address arguments on the points arising in this case. The application was allowed and we have had the benefit of hearing arguments of Shri M.S Syali, Advocate on behalf of the intervener. The contention of Mr. Syali was primarily concerned with the interpretation of Section 68 and his submission was that if share capital has been issued then, the provisions of section 68 cannot be attracted. He, however, submitted that if the Income-tax Officer finds that the shareholders to whom shares are issued are fictitious persons and are non-existent then it may be possible to hold that there is no valid issue of share capital and the provisions of section 68 may then be invoked. It was further argued that the share capital received by the company cannot be taxed as a revenue receipt and that is why once shares are issued to persons who existed the receipt of the money cannot be taxed as income from undisclosed sources of the company.
13. Two questions, therefore, arise for consideration in the present case, the first question is as to the correct interpretation of Section 68 and whether, in acase like the present can a situation ever arise where Section 68 can be invoked. The second question which arises for our consideration is as to whether the question proposed is one of fact and whether it can be re-framed.
14. Section 68 of the Income-tax Act 1961 reads as under:
“68.4 Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”
15. Mr. Syali is right in contending that the aforesaid Section merely codifies what was the state of law prior to its enactment. Even when the Income-tax Act, 1922 was in force it had been held in all judicial pronouncements that if cash credits are found in the books of accounts of the assessee and no explanation about the nature and source thereof is given or the explanation is not found satisfactory then the same could be charged to Income-tax as income from undisclosed sources. The only question which at times used to arise was as to in which year it could be said that the income had accrued, but that question can no longer arise because Section 68 provides that the amount so credited is to be regarded as the income of the assessee for “that previous year” i.e, the previous year in which the same is found credited in the books of the assessee. It is not unknown that in order to avoid payment of tax amount may be credited in the books of accounts in such a manner which may not disclose its true nature or source thereof. For example, amounts may be credited in the books of account showing as if they represent sums received from different persons. As we read Section 68 it appears that whenever a sum is found credited in the books of accounts of the assessee then, irrespective of the colour or the nature of the sum received which is sought to be given by the assessee, the Income-tax Officer has the jurisdiction to enquire from the assessee the nature and source of the said amount. When an explanation in regard thereto is given by the assessee then, it is for the Income-tax Officer to be satisfied whether the said explanation is correct or not. It is in this regard that enquiries are usually made in order to find out as to whether, firstly the persons from whom money is alleged to have been received actually existed or not. Secondly depending upon the facts of each case the Income-tax Officer may even be justified in trying to ascertain the source of the depositor assuming he is identified, in order to determine whether that depositor is a mere name lender or not. Be that as it may, it is clear that the Income-tax Officer has jurisdiction to make enquiries with regard to the nature and source of a sum credited in the books of account of an assessee and it would be immaterial as to whether the amount so credited is given the colour of a loan or a sum representing the sale proceeds or even receipt of share application money. The use of the words “any sum found credited in the books” in Sec.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.
16. If the amount credited is a capital receipt then it cannot be taxed but it is for the Income-tax Officer to be satified that the true nature of the receipt is that of capital. Merely because the company chooses to show the receipt of the money as capital does not preclude the Income-tax Officer from going into the question whether this is actually so. Section 68 would clearly empower him to do so. Where, therefore, the assessee represents that it has issued shares on the receipt of share application money then the amount so received would be credited in the books of account of the company. The Income-tax Officer would be entitled to enquire, and it would indeed be his duty to do so, whether the alleged shareholders do infact 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 sharecapital. Shares cannot be issued in the name of non-existing persons. The use of the words “may be charged” (emphasis added) in Section 68 clearly indicates that the Income tax Officer would then have the jurisdiction, if the facts so warrant, to treat such a credit to be the income of the assessee.
17. It is not necessary nor desirable to give examples to indicate under what circumstance Section 68 of the Act can or cannot be invoked. What is clear, however, is that Section 68 clearly permits an Income Tax Officer to make enquiries with regard to the nature and source of any or all the sums credited in the books of account of the company irrespective of the nomenclature or the source indicated by the assessee. In other words, the tnithfullness of the assertion of the assessee regarding the nature and the source of the credit in its books of account can be gone into by the Income-tax Officer. In the case of Steller Investment Ltd. the Income-tax Officer had accepted the increased subscribed share capital. Section 68 of the Act was not referred to and the observations in the said judgment cannot mean that the Income-tax Officer cannot or should not go into the question as to whether the alleged shareholders actually existed or not. If 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 and to that extent the observations in the case of Steller Investment are correct but if, on the other hand, the assessee offers no explanation at all or the explanation offered is not satisfactory then, the provisions of section 68 may be invoked. In the latter case Section 68, being a substantive section, empowers the Income-tax Officer to treat such a sum as income of the assessee which is liable to be taxed in the previous year in which the entry is made in the books of account of the assessee.
18. We make it clear that we are not deciding, and nor is our intention to do, as to on whom and to what extent is the onus to show that an amount credited in the books of account is share capital and when does that onus stand discharged. This will depend on the facts of each case.
19. Coming to the second aspect of the case, in CIT v. Biju Patnaik, 160 ITR 674 a question arose whether cash credits in the name of a trust in the books of account of the assessee were genuine or not, an explanation was offered but the Income-tax Officer came to the conclusion that the said trust did not exist and even if it did it did not have funds and the said trust was used as a camouflage by the assessee to put through his unaccounted money. He also came to the conclusion that 39,000 shares of Kalinga Tubes Ltd., acquired in the name of seven persons with moneys advanced in the name of trust actually belonged to the respondent, the holders being his benamidars and the dividends there from were taxable in the hands of the assessee. The Tribunal, however, decided in favour of the assessee and rejected the application under Section 256(1). The High Court also declined to call forthe statement of the case and, on a special leave being filed, the Supreme Court held that the Tribunal had not considered the identity and credit worthiness of the donors to the trust and it had also not considered the material collected by the officer regarding the benami nature of the shareholders and, therefore, questions of law did arise. In the present case also the Income-tax Officer did not make any enquiries as to the existence or genuineness of the shareholders and, therefore, the CIT revised the order under Section 263 of the Act. The Tribunal did not advert to this finding of the CIT at all and it did not hold that enquiries as to the existence of the shareholders were made by the ITO. What was relevant, in the first instance, was whether the shareholders existed and in the absence of such an enquiry whether action was validly taken under Section 263 or not was certainly a question of law which should have been referred. The ratio of the decision of the Supreme Court in Biju Patnaik's case is clearly applicable here. We may only note that the learned counsel for the petitioner has relied on the following decisions of the various High Courts where it was held that when an order under Section 263 is passed and the Tribunal sets aside that order a question of law does arise and these decisions are:—
196 ITR 647 (CIT v. Smt. Sangeeta Agarwal);
198 ITR 611 (Malabar Industries Ltd. v. CIT),
198 ITR 347 (CIT v. Hari Om Aggarwal) and
198 ITR 464 (CIT v. Urmila Devi).
20. It is, however, contended by the learned counsel for the assessee that the question as proposed assumes that the facts found by the Tribunal are correct. It is submitted that a question cannot be so re-framed as to require reference of a question which was not asked for by the petitioner. It was also submitted that the decision of the Tribunal that the Income-tax Officer had made enquiries which he could have under the circumstances was a finding of fact and this finding had not been challenged.
21. We are unable to agree with the aforesaid submission of the learned counsel for the assessee. The very basis on which action was taken under Section 263 by the Commissioner of Income-tax was that the Income-tax Officer had not carried out the enquiries which he should have. It was held by the Commissioner of Income-tax that:—
“lack of handling by the ITO is patent from the record…. Although details were filed by the assessee, the ITO did not make any enquiry by way of cross-verification. He merely accepted the statement of the assessee without any enquiry or investigation. The assumption of jurisdiction u/s263 for non-enquiry by the ITO is supported by the Delhi High Court in the case of Gee Vee Enterprise…Petitioner v. Additional Commissioner Of Income Tax… (1) and Others reported as 99 ITR 375”.
It was only because no enquiries were made that the order of assessment was set aside by the CIT. This was one of the questions which arose for consideration before the Tribunal. In the application under Section 256(1) filed by the Department it was stated that:—
“The ITAT relying upon its decision in the case of Standard Cylinders set aside the order passed by the CIT u/s263 of the I.T Act. The findings of the ITAT in this case are not accepted as the decision in the case of Standard Cylinders was also not accepted by the Department and a reference has been filed in the High Court”.
22. Earlier it was stated in the statement of facts drafted by the Department that the Commissioner had held that the assessment was made by the ITO without making necessary and appropriate enquiries with regard to share capital raised by the company and to that extent the order passed by the ITO was erroneous and prejudicial to the interest of the revenue. By filing an application under Section 256(1) and 256(2) what the Department is seeking to do is really to assail the conclusion of the Tribunal that the CIT was wrong in setting aside the assessment order. The only reason why the assessment order was set aside was that full enquiries had not been made by the ITO. That was the only point in dispute which arose before the Tribunal and that is the only point which could be agitated in an application under Section 256(2) of the Income-tax Act. The real controversy between the parties was with regard to the extent of enquiries which were made by the Income-tax Officer while framing the assessment. That was the real controversy in issue.
23. In SP Gramophone Company v. CIT 158 ITR a question arose with regard to the genuineness of a firm who had applied for registration. One of the questions which was referred to the Tribunal, in that case, on the insistence of the assessee was as follows:—
“Whether, on the facts and in the circumstances of the case and on a true construction of the instrument of partnership dated April 1, 1960 a valid partnership had come into existence?”
24. The High Court was of the opinion that the said question did not bring into focus the real issue which arose between the parties and re-framed the question as follows:
“Whether, on the facts and in the circumstances of the case and on a true construction of the instrument of partnership dated April 1, 1960, there is a genuine partnership, and whether the finding that there is no genuine partnership is based on evidence?”
25. It was contended before the Supreme Court, on behalf of the assessee, that the Tribunal had not recorded any clear finding with regard to the genuineness of the firm as it had proceeded on the basis that no valid firm in law had come into existence but the High Court went out of its way to deal with the question of genuineness of the appellate firm by re-casting or re-framing the said question and the same should not have been done. On behalf of the revenue the submission was that it was open to the High Court to re-frame or re-cast the question formulated by the Tribunal so as to bring out the real issue between the parties. While accepting this submission the Supreme Court held as follows:—
“On a consideration of the entire material on record and on giving our anxious thought to the rival submissions made by counsel on either side, we are of the opinion that in the ultimate analysis, the real controversy in the appeal centres around the question whether or not factually a genuine firm had come into existence for the assessment year 1961-1962 as a result of the execution of the instrument of partnership on April 1, 1960, and whether for recording a negative finding thereon against the assessee, as was done by the lower authorities, there was evidence on the record? This being the real issue which was not reflected in the first question formulated by the Tribunal, the High Court, in our view, was justified in reframing that question”.
26. The aforesaid observations of the Supreme Court are applicable, with equal force, to the present case also and the question can be so re-framed by this court in order to bring out the real issue between the parties.
27. In CIT v. Electric Construction and Equipment Co. Ltd. 183 ITR 666 one of the questions sought to be raised was “whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in allowing bad debts of Rs. 17,398/- for which the assessee could not furnish any details?” The contention of the revenue was that before the Tribunal two letters were brought on record for the first time and the Tribunal had based its decision without any due verification of the said letters. Even though question with regard to verification of the letters was not sought, a Division Bench of this Court nevertheless came to the conclusion that reliance on material without due verification raised a question of law and re-framed the said question as follows:
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in permitting deduction of Rs. 17,398/- on the basis of the letters dated March 24, 1976 and November 3, 1977, produced for the first time, without due verification of the said letters?”
28. It is submitted by the learned counsel for the assessee while referring to a decision in the case of CIT v. Greaves Cotton And Co. Ltd., 68 ITR 200 that a finding of fact unless specifically challenged cannot be assailed in a reference under Section 256. There can be no quarrel on this proposition of law but it is equally well settled as is evident from the two decisions cited hereinabove that in order to bring out the real controversy in issue the High Court can re-frame a question. At the cost of repetition it may be said that in the present case the real controversy was whether the Commissioner of Income-tax was right in coming to the conclusion that the Income-tax Officer had not made the necessary enquiries and action under Section 263 of the Act was called for.
29. In our opinon a question of law does arise and, we, therfore, direct the Tribunal to state the case and refer the following reframed question to this Court:—
“Was the Tribunal right in setting aside the order of Commissioner under Section 2,63 of the Income-tax Act and in holding that the assessment order of the assessee could not be said to be erroneous or prejudicial to the revenue”
30. There will be no order as to costs.