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Commissioner Of Income-Tax v. Nivedan Vanijya Niyojan Ltd.
Factual and Procedural Background
The reference contains two questions referred to the court: (1) whether the Tribunal was justified in deleting an addition of Rs. 3,93,000 treated as introduction of share capital (impugned under section 68 of the Income-tax Act, 1961); and (2) whether the Tribunal was justified in directing the Assessing Officer to charge tax at 55% instead of 65% by treating the assessee as a "company in which the public was interested" under section 2(18). The Assessing Officer made additions and applied a 65% rate; the Commissioner (Appeals) and the Tribunal reduced certain additions and applied a 55% rate. The High Court was asked to resolve these questions on reference.
Legal Issues Presented
- Whether the learned Tribunal was justified in law in deleting the addition of Rs. 3,93,000 as introduction of share capital?
- Whether the Tribunal was justified in law in directing the Assessing Officer to charge tax at 55 per cent, instead of 65 per cent, although the ‘a’ is not entitled for the same as per term and condition as per company's law?
Arguments of the Parties
Assessee's Arguments (Mr. Som)
- Relied on Commissioner Of Income-Tax v. Korlay Trading Co. Ltd. for the proposition that furnishing of income-tax file number is not sufficient to discharge the burden.
- Contended (by reference to section 2(18)) that the assessee should be treated as a "company in which the public was interested", supporting application of 55% tax rate; Mr. Som "led us through section 2(18) of the Act".
- Commissioner (Appeals) accepted part of the claim because income-tax file numbers of some subscribers were disclosed, leading to modification of the Assessing Officer's addition to Rs. 83,000.
Revenue / Assessing Officer's Position
- Assessed the Rs. 3,93,000 as ingenuine subscription to share capital under section 68, holding the assessee failed to establish identity of subscribers, their creditworthiness, and genuineness of the transaction.
- Applied the 65% tax rate on the basis that the assessee was not a company within the meaning of section 2(18) of the Income-tax Act.
- Conducted enquiries after initial material was produced; required the assessee to produce subscribers, which the assessee did not do.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Hindusthan Tea Trading Co. Ltd. v. CIT, [2003] 263 ITR 289 (Cal) | Establishing identity of subscribers, proving their creditworthiness and the genuineness of the transaction under section 68 are principal ingredients. | Court treated this decision as crystallising the law on section 68 and applied its principles to find the assessee failed to establish those ingredients; used to reject Commissioner (Appeals)'s modification inconsistent with AO's findings. |
| CIT v. Ruby Traders and Exporters Ltd., [2003] 263 ITR 300 (Cal) | Same principle as Hindusthan Tea Trading — identity, creditworthiness and genuineness required under section 68. | Court relied on this decision alongside Hindusthan Tea Trading to hold the Tribunal and Commissioner (Appeals) erred in their approach. |
| Commissioner Of Income-Tax v. Korlay Trading Co. Ltd., [1998] 232 ITR 820 (Cal) | Furnishing of income-tax file number is not sufficient to discharge the burden of proof. | Recognised the proposition but held that when some material is produced the Revenue must inquire; here the assessee did not produce subscribers when required, so Korlay did not assist the assessee. |
| Commissioner Of Income-Tax v. Stellar Investment Ltd., [1991] 192 ITR 287 (Delhi) | Held that if subscribers were not available they could be assessed at their hands and not at the hands of the assessee. | Court held Stellar Investment's ratio was no longer good law as it was overruled by a Full Bench decision (Sophia Finance); concluded the Tribunal proceeded on a wrong proposition of law by relying on Stellar. |
| Commissioner Of Income-Tax, N. Delhi… v. Sophia Finance Ltd…, [1994] 205 ITR 98 (Delhi) | Full Bench decision overruling the Stellar Investment approach. | Court treated Sophia Finance as overruling Stellar Investment and relied on that to reject the Tribunal's reliance on Stellar. |
| CIT v. Steller Investment Ltd., [2001] 251 ITR 263 | Supreme Court order dismissing S.L.P. against Stellar Investment Ltd. | Court noted that dismissal of S.L.P. is not equivalent to a binding ratio under article 141 and that the Full Bench decision (Sophia Finance) governs; therefore Stellar's ratio cannot be treated as good law. |
Court's Reasoning and Analysis
Question 1 — section 68 addition:
- The court stated the law is crystallised by Hindusthan Tea Trading Co. Ltd. and Ruby Traders and Exporters Ltd.: identity, creditworthiness and genuineness of subscribers must be established.
- The Assessing Officer's order (pages 9–13 of the paper book) showed the assessee failed to establish these three ingredients for the Rs. 3,93,000; the Commissioner (Appeals) nevertheless modified the addition to Rs. 83,000 because some income-tax file numbers were disclosed for subscribers.
- The court accepted the principle from Korlay that mere file numbers are not sufficient, but observed that when material is produced the Revenue must inquire; here inquiries were made and the assessee failed to produce the subscribers as required.
- The Tribunal relied on Stellar Investment Ltd.'s ratio (that absent subscribers could be assessed on their hands), but that ratio was overruled by the Full Bench in Sophia Finance Ltd.; the Supreme Court's dismissal of an S.L.P. does not operate as a binding ratio under article 141 in this context.
- Conclusion: the Tribunal proceeded on a wrong proposition of law; the Assessing Officer's order is in accordance with law and must be affirmed.
Question 2 — rate of tax (section 2(18)):
- The Assessing Officer applied a 65% rate because the assessee was not a company within section 2(18).
- The Commissioner (Appeals) and the Tribunal applied a 55% rate treating the assessee as a company in which the public was interested.
- The court examined section 2(18) clauses (a), (aa), (ab), (ac) and (b) as discussed in the opinion and found the company could not be brought within any of those clauses: it could not be treated as a company in which the public was interested.
- Conclusion: the reduction to 55% by the lower authorities was in error; the Assessing Officer's application of 65% stands.
Holding and Implications
Final Ruling: The court set aside the orders of the Tribunal and the Commissioner (Appeals), affirmed the order of the Assessing Officer, and answered both questions No. 1 and No. 2 in the negative in favour of the Revenue. The reference was disposed of.
Implications: Direct effect is that the Assessing Officer's additions (to the extent upheld) and the 65% tax rate are affirmed; the reductions made by the Commissioner (Appeals) and the Tribunal are set aside. The opinion does not state that it establishes a new broader precedent beyond applying and following the cited authorities.
D.K Seth, J.:— Two questions have since been referred to in this case, namely:
“1. Whether the learned Tribunal was justified in law in deleting the addition of Rs. 3,93,000 as introduction of share capital?
2. Whether the Tribunal was justified in law in directing the Assessing Officer to charge tax at 55 per cent, instead of 65 per cent, although the ‘a’ is not entitled for the same as per term and condition as per company's law?”
2. So far as the first question is concerned, it relates to addition of Rs. 3,93,000 on account of the subscription to share capital being held as ingenuine transaction under section 68 of the Income-tax Act, 1961.
3. The law with regard thereto has since been crystallised. Similar question was involved in I.T Reference No. 20 of 1996) (Hindusthan Tea Trading Co. Ltd. v. CIT, [2003] 263 ITR 289 (Cal)) and I.T Reference No. 78 of 1995 (CIT v. Ruby Traders and Exporters Ltd., [2003] 263 ITR 300 (Cal)) disposed of by this court on March 11 and 12,2003. The principal ingredient that has to be satisfied is to establish the identity of the subscribers and prove their creditworthiness and the genuineness of the transaction. We have gone through the order of the Assessing Officer at pages 9-13 of the paper book. It appears that the assessee had failed to establish any of these three ingredients in respect of the said amount. The Commissioner (Appeals) modified the order to Rs. 83,000 and accepted the balance simply because income-tax file numbers of the other subscribers were disclosed. It appears from pages 36-37 of the paper book containing the order of the Commissioner (Appeals) that these few persons who nad subscribed 8,300 shares were not income-tax assessees. Therefore, only these were added.
4. Mr. Som had relied on a decision in Commissioner Of Income-Tax v. Korlay Trading Co. Ltd., [1998] 232 ITR 820 (Cal), where it was held that furnishing of income-tax file number is not sufficient to discharge the burden. The proposition may be correct. But when some material is produced, it is incumbent on the Revenue to enquire into the same. In this case after the initial onus was discharged by the assessee, the income-tax authority had made enquiries and had communicated the result of the enquiry to the assessee and required the assessee to produce the subscribers and establish its case. But the assessee did not do so. Therefore, we do not think that the Commissioner (Appeals) had rightly approached the case. The principle is already laid down in the aforesaid two decisions, namely, Hindusthan Tea Trading Co. Ltd.'s case, [2003] 263 ITR 289 (Cal)—I.T Reference No. 20 of 1996 and Ruby Traders and Exporters Ltd.'s case, [2003] 263 ITR 300 (Cal)—I.T Reference No. 78 of 1995.
5. The learned Tribunal, however, proceeded on the basis of the ratio decided in Commissioner Of Income-Tax v. Stellar Investment Ltd., [1991] 192 ITR 287 (Delhi). According to the learned Tribunal, if the subscribers were not available, in that event, it can be assessed at the hands of such subscribers, not at the hands of the assessee. But this decision was overruled by the Full Bench decision in Commissioner Of Income-Tax, N. Delhi… v. Sophia Finance Ltd…., [1994] 205 ITR 98 (Delhi). Therefore, the ratio decided in Stellar Investment Ltd.'s case, [1991] 192 ITR 287 (Delhi) is no more good law. Though an S.L.P was preferred against Stellar Investment Ltd.'s case, [1991] 192 ITR 287 (Delhi) and the S.L.P was dismissed (CIT v. Steller Investment Ltd., [2001] 251 ITR 263), yet the order of the apex court while dismissing the S.L.P is not a ratio decided binding under article 141 of the Constitution of India, as we have held in the said decisions in Ruby Traders and Exporters Ltd.'s case, [2003] 263 ITR 300 (Cal) and Hindusthan Tea Trading Co. Ltd.'s case, [2003] 263 ITR 289 (Cal). The learned Tribunal, therefore, proceeded on the basis of a wrong proposition of law.
6. Therefore, we are of the view that the order passed by the Assessing Officer was in accordance with law and that of the Commissioner (Appeals) cannot be sustained to the extent, which is contrary to the finding of the Assessing Officer. We, therefore, hereby set aside the order of the learned Tribunal and that of the Commissioner (Appeals) and affirm the order of the Assessing Officer and answer question No. 1 in favour of the Revenue in the negative.
7. With regard to question No. 2, it appears that the Assessing Officer has applied 65 per cent, rate of taxes since the assessee was not a company within the meaning of section 2(18) of the Income-tax Act. But both the Commissioner (Appeals) and the learned Tribunal had applied 55 per cent, as rate of taxes on the basis that the assessee was a company in which the public was interested. Mr. Som had led us through section 2(18) of the Act. We find that this company cannot be brought within the purview of clauses (a) and (aa). Nor can it be brought within the scope of clause (ab) since it has share capital. Neither can it come under clause (ac) in the absence of any declaration. Neither it can be brought within the scope of clause (b). Therefore, it cannot be said to be a company in which the public was interested. Therefore, both the Commissioner (Appeals) and the learned Tribunal had erred in law in reducing the rate of taxes and reversing the order of the Assessing Officer.
8. We, therefore, set aside the order of the learned Tribunal and that of the Commissioner (Appeals) with regard to the reduction of the rate of taxes to 55 per cent, and affirm the order of the Assessing Officer fixing the rate at 65 per cent, and answer question No. 2 in the negative in favour of the Revenue.
9. This reference is, thus, disposed of.
R.N Sinha, J.:— I agree.
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