ITA No. 194 of 2011 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 194 of 2011 Date of Decision: 14.7.2011 M/s Power Drugs Ltd. ....Appellant. Versus Commissioner of Income Tax and another ...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 under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 22.10.2010 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh (hereinafter referred to as “the Tribunal”) in ITA No. 706/Chd/2009, relating to the assessment year 2005-06, claiming the following substantial questions of law:- “i) Whether in facts and circumstances of the case, the action of the authorities below in treating the subscription of the share capital by alleged bogus shareholder as undisclosed income of the assessee is legally sustainable in the eyes of law? ITA No. 194 of 2011 -2- ii) Whether in facts and circumstances of the case, the action of the authorities below in ignoring the law laid down by the Hon'ble Supreme Court in the case of CIT v. Steller Investment Ltd. reported as [2001] 251 ITR 263 (SC) is legally sustainable in the eyes of law? iii) Whether in the facts and circumstances of the case, the action of the authorities below is result of an error in interpreting the decision of the Hon'ble Apex Court in the case of Lovely Exports (Supra)? iv) Whether in facts and circumstances of the case, the authorities below have erred in applying the proviso to Section 36(1)(iii) of the Act when the disputed amount was subject matter of litigation? v) Whether in facts and circumstances of the case, the impugned orders Annexures A-1 to A-3 passed by the authorities below, are legally sustainable in the eyes of law?” 2. Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee filed its return for the assessment year 2005-06 on 31.10.2005 declaring an income of Rs.34,58,867/- which was reduced to nil by adjusting brought forward losses of the earlier years. The return of the assessee was processed under 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 the Act. The case of the assessee was selected under compulsory scrutiny ITA No. 194 of 2011 -3- 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 assessee had received Rs.42,78,756/- as share application money through private persons. During enquiry, the assessee furnished the names of persons, their addresses and share application forms which had the signatures or thumb impressions. The Assessing Officer held that the assessee had failed to discharge primary onus to establish the identity, credit worthiness and genuineness of the transactions. Further, during the year in question, the assessee had advanced Rs.25 lacs each to Mr. Ashok Anand and Mrs. Raj Rani Anand. The Assessing Officer while relying upon the judgment of this Court in M/s Abhishek Industries Ltd. v. CIT, [2006] 286 ITR 1 (P&H), held that the interest relatable to advances of such amount was disallowable. The reliance was also placed on Section 36(1)(iii) of the Act. Accordingly, the Assessing Officer vide order dated 28.12.2007 disallowed a sum of Rs.6 lacs on this account. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT (A) vide order dated 23.4.2009 held that the assessee had not discharged his primary onus of establishing identity, credit worthiness and genuineness of transaction under Section 68 of the 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 had been put to use. Still feeling dissatisfied, the assessee approached the Tribunal. The Tribunal vide order dated 22.10.2010 rejected both the grounds of the assessee which gave rise to the assessee to approach this Court by way of instant appeal. ITA No. 194 of 2011 -4- 3. We have heard learned counsel for the appellant. 4. Learned counsel for the assessee submitted that the Tribunal had erred in treating the income on account of share application money to be undisclosed income of the assessee. According to him, the department could have proceeded against the individuals in whose name the share application money was deposited. He relied upon the ratio laid down by the Hon'ble Supreme Court in Commissioner of Income Tax v. Loverly Exports (P) Ltd. [2008] 216 CTR (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 the disallowance of Rs.6,00,000/- on account of interest relatable to advances to Mr. Ashok Anand and Mrs. Raj Rani Anand under Section 36(1)(iii) of the Act was unsustainable. 5. We do not find any substance in the submission made by learned counsel for the assessee. The Tribunal while upholding that the amount of Rs.42,78,756/- received by the assessee as share application money was infact undisclosed income of the assessee had adjudicated the said issue against the assessee with the following observations:- “7. The assessee is a unlisted company and had not made any public issue. During the year under consideration, the assessee had received Rs.42,78,756/- as share application money through private placing. The assessee was asked to furnish the details thereof. In reply the assessee furnished ITA No. 194 of 2011 -5- the names of persons as per Annexure II where mostly the amounts were shown to have been received from some names of village and P.O. Alewa, Jind, Haryana as noted by the Assessing Officer. The Assessing Officer was of the view that the assessee had failed to discharge primary onus to establish the identity, credit worthiness and genuineness of the transactions. The Assessing Officer observed that the assessee had not discharged the primary onus and on perusal of the information noted as under:- i. Names only ii. Incomplete address in view only village and Post Office, Alewa. iii. Share application forms which do not bear photographs of these persons. iv. Some of applications just bear thumb impression. v. None of them is an income tax assessee and do not even have PAN except Ms. Rekha Goel who has allegedly advanced an amount of Rs.2.00 lakhs in cash. The most important fact to be noted is that huge amounts in lakhs of rupees have been deposited in cash by non- assessees having no PAN, without any photographs and without any evidence ITA No. 194 of 2011 -6- regarding their credit worthiness to advance such large amount in cash. 8. The Assessing Officer invoked the provisions of Section 68 of IT Act and made the addition of Rs.42,78,756/-. 9. Before the CIT(A) the stand of the assessee was that under the Company's Act the assessee can receive share application money either in cash or cheque. It was further submitted by the Ld. Counsel for the assessee before the CIT(A) that the applicants did not possess any PAN and the copies of share application forms were furnished before the Assessing Officer, which had requisite details of the said person. It was further pointed out by the Ld. Counsel for the assessee that in view of the ratio laid down by the Hon'ble Supreme Court in CIT v. Lovely Export Pvt. Ltd. [(2008) 216 CTR (SC) 195] even though the share application money was received from alleged bogus share holders whose names were given, no addition can be made in the hands of the assessee company and action, if any, is to be taken only in the case of the share applicants. The CIT(A) held that the assessee had not discharged his primary onus of establishing identity, credit worthiness and genuineness of transaction u/s 68 of IT Act. Moreover, entire sum was received in cash ITA No. 194 of 2011 -7- where genuineness of transaction is always in doubt. The CIT(A) further held that the assessee had failed to file the confirmation from the creditors and onus not being discharged, the addition merits to be upheld. The Ld. A.R. for the assessee drew our attention to the share application forms received from 28 persons placed at pages 7 to 34 of the paper book in which the requisite details of each persons was given. The Ld. D.R. for the revenue placed reliance on the order of CIT(A) and pointed out that the amounts in question were received in cash and the identity of the share holders not having been established, the addition merits to be upheld. 10. We have heard the rival submissions and perused the record. The assessee company during the year under consideration had raised share application of money of Rs.42,78,756/-. The entire share application money was received in cash and as per the claim of the assessee the sum was received from 28 persons. The assessee had furnished on record the copies of share application forms submitted for allocation of shares, copies of which are placed at pages 7 to 34 of the paper book. The perusal of said share application forms revealed the assessee to have furnished the names, father's name and addresses of the parties which were found ITA No. 194 of 2011 -8- to be incomplete by the Assessing Officer/CIT(A). In some cases even the address were found to be incomplete. 11. The issue involved in the present ground came up for consideration before the Hon'ble Apex Court in CIT Vs. Lovely Exports (P) Ltd. (supra). The High Court while deciding the issue as reported in Lovely Exports (P) Ltd. vs. CIT 299 ITR 268 was of the view that in the context of section 68 of the Income Tax Act, the Assessing Officer has to prima facie establish (i) the identity of the creditor ii) the genuineness of the transactions, whether transmitted through banking indisputable channels iii) the creditworthiness or financial strength of the creditor. The Court further observed that if the relevant details of the address or PAN identity of the creditor/ subscriber were furnished along with other details i.e. share holder register, share application form, share transfer register etc. It would constitute acceptable proof or acceptable explanation by the assessee. The onus of the assessee therein was held to stand discharged where the identity of the creditor/subscriber was proved and it was further held that the Assessing Officer was duty bound to investigate the creditworthiness of the creditor/ subscriber and the genuineness of the transactions ITA No. 194 of 2011 -9- and the veracity of the repudiation of the creditor/ subscriber. The Special Leave Petition filed by the Revenue against the said decision of the Court was dismissed by the Supreme Court vide its decision reported in (2008) 216 CTR SC 195, which reads as under:- “Can the amount of share money be regarded as undisclosed income under section 68 of the Income Tax Act? We find no in Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the department is free to proceed to reopen their individual assessments in accordance with law. Hence, no infirmity is found with the impugned judgment.” 12. The Hon'ble Delhi High Court in CIT v. Winstral Petro Chemicals Pvt. Ltd. (ITA No. 592/2010) date of judgment 12.5.2010 after relying on the ratio laid down by the Apex Court in Lovely Exports (P) Ltd. (supra) observed that where the identity of the subscriber has been established by way of different proofs filed in this regard and if the Assessing Officer entertains any doubt about the genuineness of the documents, the same could have been verified by ITA No. 194 of 2011 -10- him from the records available with the authorities. From the above said, it transpires that the onus is upon the assessee to establish the identity of the subscriber in relation to the share application money received. Where the assessee fails to establish the identity of the subscriber, the onus cast upon the assessee to prove that the credits are genuine does not stand discharged. The Assessing Officer during the course of assessment proceedings, on the perusal of the information furnished by the assessee found the assessee to have only disclosed the names of the persons and incomplete addresses were bearing only thumb impression. The total share application money was received in cash and not through banking channels and none of the said persons were income tax assessees nor had any PAN numbers. In the facts of the present case the assessee has failed to prove the identity of the subscriber and applying the ratio laid down in the case of Lovely Exports (P) Ltd. (supra), we are in conformity with the order of CIT(A) and uphold the addition of Rs.42,78,756/-.” 6. The assessee was unable to establish the identity, credit worthiness and the genuineness of the transaction so as to escape from the provisions of Section 68 of the Act. Whether an addition is to be made in the hands of the company or individual assessee in such ITA No. 194 of 2011 -11- circumstances depends upon the facts of each case. The primary onus lies upon the assessee to establish that the assessee is not liable for addition under Section 68 of the Act as the amount in fact belongs to the 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 the company. 7. Adverting to the second issue relating to disallowance of interest under proviso to Section 36(1)(iii) of the Act on the ground that the assessee had paid the amount of interest relating to expansion of its business prior to the utilization of the machinery, the Tribunal had categorically held that the assessee had borrowed the loans which were utilized for making the advances for acquisition of new asset. The amount of interest was attributable to the capital borrowed for acquisition of new asset for expansion of the existing business. The finding recorded by the Tribunal in this respect would be advantageous to be noticed here which reads thus:- “On hearing the rival contentions of the parties, we find that it is an admitted position that the amount was advanced for acquisition of new asset which was claimed to be for the furtherance of the business activity of the assessee before us. Admittedly, the amount was not advanced as a loan and we find no merit in the orders of authorities below in applying the ratio laid down by the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries ITA No. 194 of 2011 -12- (supra). However, admittedly the assessee had borrowed the loans which were utilized for making the said advances. We are in conformity with the orders of authorities below that the proviso under Section 36(1)(iii) of the Act is squarely applicable to the facts of the present case. The amount of interest attributable to the capital borrowed for acquisition of new asset for expansion of the existing business cannot be allowed as deduction for the period beginning from the date on which the capital was borrowed till the date of the asset being put to use. Accordingly we sustain the disallowance of Rs.6 lacs and dismiss the ground No.4 raised by the assessee.” 8. No perversity could be pointed out in the aforesaid findings recorded by the Tribunal and this Court is of the opinion that no substantial question of law arises in this appeal. The appeal is accordingly dismissed. (AJAY KUMAR MITTAL) JUDGE July 14, 2011 (ADARSH KUMAR GOEL) gbs ACTING CHIEF JUSTICE