COMMISSIONER OF INCOME TAX vs. M/S SRI BABA RUPA DASS

ITA No.146 of 2005 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 146 of 2005 Date of decision: 03.10.2012 Commissioner of Income Tax (Central), Ludhiana. -----Appellant Vs. M/s Sri Baba Rupadas Spinning Mills (P) Limited now M/s BRD Textiles (P) Limited, Village Doogarwas, Rewari. ----Respondent CORAM:- HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON'BLE MR. JUSTICE GURMEET SINGH SANDHAWALIA Present:- Mr. Rajesh Sethi, Advocate for the appellant. Mr. Sanjay Bansal, Sr. Advocate with Mr. Rajiv Sharma, Advocate for the respondent. Ajay Kumar Mittal,J. 1. This order shall dispose of ITA Nos.80 and 146 of 2005 as according to learned counsel for the parties, the factual matrix and the issues involved in both the appeals are identical. However, the facts are being extracted from ITA No.146 of 2005. 2. ITA No.146 of 2005 appeal has been preferred by the revenue under section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 30.1.2003 passed by the Income Tax Appellate Tribunal, Delhi Bench 'C', New Delhi (for brevity, “the Tribunal) in ITA No.1543/Del/98 for the assessment year 1994-95. 3. In our opinion, the following substantial questions of law arise for consideration in this appeal:- i) Whether on the facts and in the circumstances of the case, the amount received by the assessee-company

ITA No.146 of 2005 2 from share-holders/share-applicants, prior to the commencement of its business operations would be a capital receipt or income from undisclosed sources under Section 68 of the Income Tax Act, 1961? ii)Whether on the facts and in the circumstances of the case, an amount received by the assessee-company from its shareholders whose identity is established would be liable to be assessed as income from undisclosed sources under Section 68 of the Income Tax Act, 1961? 4. Briefly, the facts as narrated in ITA No.146 of 2005 may be noticed. The respondent-assessee is a private limited company. Return for the assessment year 1994-95 declaring loss of ` 24,37,640/- on account of unabsorbed depreciation was filed on 30.11.1994. During the course of assessment proceedings, it was noticed by the Assessing Officer that the total investment in the share capital was ` 1,49,03,000/- and unsecured loans stood at ` 13,50,000/-. Inspite of sufficient opportunities afforded, amounts received towards share capital/loans amounting to ` 72,43,000/- were not satisfactorily explained. Assessment was framed at an income of ` 48,96,340/- under Section 143(3) of the Act vide order dated 27.3.1997, Annexure A.1. Aggrieved by the order of the Assessing Officer, the respondent filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], Faridabad who vide order dated 29.12.1997, Annexure A.2 deleted the addition of ` 72,43,000/- by invoking the provisions of Section 68 of the Act. The CIT(A) held that the respondent-assessee could not be taxed in respect of the impugned amounts received towards the share capital or loans, as the same were received before the start of commercial operations.

ITA No.146 of 2005 3 Not satisfied with the order passed by the CIT(A), the revenue went in appeal before the Tribunal. Vide order dated 30.1.2003, Annexure A.3 the Tribunal dismissed the appeal. It was held that the amounts received by the respondent as share capital or loans before the commencement of commercial operations were of capital nature. Hence the present appeals by the revenue. 5. Learned counsel for the revenue submitted that the assessee-company had introduced investment in the share capital of the company in the form of share holders which did not have the credibility or the resources to pay the same. According to the learned counsel, it was undisclosed investment of the assessee-company which was introduced by way of share capital money and the same was exigible to tax under Section 68 of the Act. It was urged that the CIT (A) had wrongly deleted the additions on the ground that the addition made towards amount received before the start of commercial production could not be treated to be conceded income of the assessee whereas the Tribunal had erred in treating introduction of the share capital money to be of capital nature and therefore not includible under section 68 of the Act as unexplained investment. 6. Learned counsel for the respondent supported the orders passed by the Tribunal in both the cases. 7. After hearing learned counsel for the parties, we find that the CIT(A) as well as the Tribunal were in error in adjudicating the issue against the revenue. 8. It would be expedient to reproduce Section 68 of the Act

ITA No.146 of 2005 4 which reads as under:- “68. Where any sum is found credited in the books of an assessee maintained for any previous year, and 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.” 9. A bare reading of the aforesaid provision shows that where the assessee is unable to furnish any explanation in respect of any sum credited in the books of account or furnishes an explanation which it is unable to substantiate, the same is to be included as income of the assessee under Section 68 of the Act. The question whether the amount was introduced prior to the commencement of the business of the company or afterwards is of no significance in as much as the aforesaid provision nowhere envisages any such eventuality. The statutory requirement for treating any amount as income of the assessee under Section 68 of the Act is where the assessee fails to justify and establishes the genuineness of the entry in the books of account. 10. Learned counsel for the revenue relied upon judgment of this Court in Power Drugs Limited v. Commissioner of Income Tax and another, (2011) 245 CTR (P&H) 623. On the other hand, learned counsel for the respondent-assessee relied upon decisions in Commissioner of Income Tax and another v. ASK Brothers Limited, (2011) 333 ITR 111 (Karn), Commissioner of Income Tax and another v. Arunananda Textiles P. Limited, (2011) 333 ITR 116

ITA No.146 of 2005 5 (Karn) and Commissioner of Income Tax v. Oasis Hospitalities P. Limited and others, (2011) 333 ITR 119 (Delhi). 11. We find that this Court in Power Drugs Limited's case (supra) had in unequivocal terms held that the primary onus was on the assessee was to establish the identity, creditworthiness and genuineness of the transaction in order to escape from the provisions of section 68 of the Act. It was further held that whether an addition is liable to be made in the hands of an assessee depends upon the facts of each case. The CIT(A) as well as the Tribunal had not adjudicated the issue on merits and had decided the issue either by holding the same to be inexigible to tax being prior to commencement of the business or that the same was capital in nature and it was not exigible to tax. Adverting to the judgments relied upon by learned counsel for the assessee, suffice it to observe that they being based on individual fact situation involved therein have no applicability to the present controversy involved herein. 12. In view of the above, both the appeals are allowed and the orders passed by the CIT(A) as well as the Tribunal in both the cases are set aside. The substantial questions of law are answered in favour of the revenue and against the assessee. The matter is remitted to CIT(A) to adjudicate the issues on merits in accordance with law. (Ajay Kumar Mittal) Judge October 03, 2012 (Gurmeet Singh Sandhawalia) 'gs' Judge