AGM Protection Devices Ltd. vs Deputy Commissioner of Income Tax

A.K. Sikri, J.—Admit.

The following substantial question of law arises for consideration in this appeal:

Whether the Income Tax Appellate Tribunal was correct in confirming the additions in respect of share capital amount and sundry creditors treating it as undisclosed income u/s 68 of the Income Tax Act, 1961?

Filing of paper book is dispensed with.

With the consent of the Learned Counsel for the parties, we have heard the matter finally.

The relevant facts giving rise to the above questions are as under:

The appellant-company was incorporated to develop and manufacture, process, reprocess, pack, repack, press, engrave, develop, design, assemble, alter, repair, renovate, galvanise, point, out, clean, convert, manipulate, decorate, adopt, test, consult, market, distribute, buy, sell, resell, purchase, import, export, indent, trade, to act as manufacturers representative and otherwise deal in switchgears, residual current circuit breakers and to run it as public company for which purpose share capital was invited from the public all over India. On account of change in law under which the limit for public limited company was raised, the appellant could not achieve the target of share capital. On this account, the appellant was not able to install factory, even though the appellant had taken the plot also. Consequently, the appellant suffered losses because whole investment made went waste and the activities of the appellant came to a standstill. The appellant filed a return declaring income of Rs. 2,419 for the year under consideration. The Assessing Officer (AO) passed ex parte orders on March 23, 1996, making addition of Rs. 33,71,197 because the appellant was not able to file confirmations due to non-co-operation of the parties. The Commissioner of Income Tax (Appeals) in appeal set aside the assessment after considering that the appellant was not in a position to file the confirmations on account of no activities in the company and also the persons were not co-operating.

The case was remitted back to the Assessing Officer pursuant to which certain notices were issued to the assessee. The assessee furnished certain details and stated that on account of no business having been done by the company for want of funds and the matter having become old, the shareholders were not co-operating. The assessee also stated that the Assessing Officer may summon them for verification of the share money given by them. The Assessing Officer, however, passed the assessment order dated March 10, 2000 determining the income, again at Rs. 33,73,687 by making additions on account of unexplained share capital. The assessee went in appeal against that order and filed written arguments as well as details of the shareholders. The Commissioner of Income Tax (Appeals) called for the report of the Assessing Officer and decided the appeal vide order dated October 20, 2004 allowing relief of Rs. 25,71,199. Against the balance amount sustained by the Commissioner of Income Tax (Appeals), the assessee filed an appeal before the Income Tax Appellate Tribunal. On the other hand the Revenue also filed an appeal against the part relief allowed in favour of the assessee. The Income Tax Appellate Tribunal has dismissed the appeal of the assessee. It has also partly allowed the appeal filed by the Revenue thereby reducing the amount of relief granted by the Commissioner of Income Tax (Appeals) by Rs. 10,36,199. Challenging the order of the Income Tax Appellate Tribunal, the present appeal is preferred by the assessee.

We have gone through the orders passed by the authorities below and find that there are certain very material aspects of the case which are glossed over by the Tribunal while holding that the assessee had not disputed the onus in showing that various investors had invested in the shares. These are as under:

(a) It was a public issue floated by the assessee-company and the shareholders who subscribed to the share capital were in large number. The assessee had received share capital of Rs. 31,72,700 from 533 persons. Out of this, 490 persons contributed from Rs. 1,000 to Rs. 5,000. Copies of the applications of these parties were duly filed before the Assessing Officer. The assessee had also demonstrated that these payments had been received through banking channel and in majority of cases through regular stock brokers. In a situation like this, it is not possible for the assessee to produce all these persons who had invested meagre amounts by way of share.

(b) The assessee was called upon to produce the parties for confirmation after a long period. Furthermore, at that time, the assessee had become non-functional as due to change in law the assessee-company could not function as was intended. It had suffered losses and had even sold all its assets. For this reason, the assessee could not refund the share capital contributed by various persons and in such circumstances it was very difficult for the assessee to have their co-operation who would naturally be not willing to come and confirm having invested.

(c) Still some of the persons came and gave the confirmation. In so far as investors in Delhi are concerned, seven parties responded to the letter of the Assessing Officer and confirmed their investments. Remaining Delhi parties either did not respond or the letters sent to them were received back with the remarks "Left without address". One of the relevant facts that not a single party came forward and denied the fact of their contributing share capital.

(d) Even members had contributed Rs. 14,76,000 about which there was no doubt as all the details, confirmations, Income Tax returns, bank accounts, etc., were furnished with the Assessing Officer.

Taking in view the totality of the circumstances, and more importantly that these were petty investments, many of whom belong to places out of Delhi and who had invested sums more than Rs. 1,000 to Rs. 5,000 and further that the company had closed down, would indicate that the investments made were not unaccounted. Before us the assessee had filed an affidavit stating that the company is dead and defunct from 1999 and since then its directors have been doing odd jobs and from 2002 they are in private service with other companies. However, this company never declared any dividend because of losses.

Going by all these circumstances, we answer the question of law framed above in favour of the assessee and thereby delete the addition made by the Assessing Officer on the aforesaid counts. The appeal is allowed in these terms.