By applying the doctrine of “origin of origin” or “source of source”, the Calcutta High Court ruled that the share capital raised by the respondent company with a huge premium was a device adopted to route undisclosed funds to the desired end of the beneficiary, taking recourse to the corporate veil. Since the respondent did not discharge the creditworthiness and the genuineness of the transactions, the Court added that registration under the Companies Act and filing of returns will not be sufficient to establish their identity and capacity to make investments, when all of them were found to have filed NIL returns.
The Division Bench comprising Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das) observed that when the shares were allotted by way of a private placement, then mere incorporation of the investing companies under the provisions of the Companies Act by itself will not validate the transaction, if the investors have no visible business activity and creditworthiness to make their investment.
In this case, the return filed by the respondent showing income of Rs. 770 was processed, which later came under scrutiny, where the AO found that the respondent had raised share capital by Rs. 1.34 crores, which were allotted at a premium. Upon examining the financial stability of the seven share subscriber companies, the AO found that all of them reported the source of investment from the sale of shares, and they had reported NIL income. Thus, opining that investor companies have no visible business activity or creditworthiness to invest, the AO called the investors to appear along with the documents, but none appeared nor assigned any proper reason for their non-appearance. Therefore, the AO treated the genuineness of the transaction and the creditworthiness of investors as unexplained and held that the respondent had raised share capital to route its undisclosed money to the desired end of the beneficiaries, taking recourse to the corporate veil. He also referred to the share subscriptions as a conceived ‘smoke screen’ and added a sum of Rs. 1.10 crores as cash credit under Section 68. When the matter reached the ITAT, it faulted the AO for having taken an adverse view without pointing out the discrepancies or insufficiency in the evidence and details furnished, and deleted the additions made by the AO.
Finally, the matter reached the High Court, where Section 68 was referred to state that the sum found credited in the books of the taxpayer may be charged to income tax if the explanation offered by the taxpayer about the nature & source of such sums found credited in his books were not satisfactory in the opinion of the AO, and such opinion itself constitutes a prima facie evidence against the taxpayer if he fails to rebut the evidence of receipts in his hands of an income nature.
Emphasising that the existence of creditworthiness of the investing companies is one of the most important factors, the Court observed that the ITAT has failed to note that the documents produced by the respondent regarding the share subscribing companies were perused and summons were issued to the directors of the subscribing companies to enable the AO to investigate into their creditworthiness as well as the genuineness of the transactions and the identity of the parties. Therefore, the Court allowed the appeal in favour of the Department, while concluding that the ITAT had fallen into error in faulting the AO for lack of enquiry.
Cases Relied on:
Kale Khan Mohammad Hanif vs Commissioner of Income Tax – [1963] 50 ITR 1 (SC)
Roshan Di Hatti vs Commissioner of Income Tax – [1977] 107 ITR 938 (SC)
Appearances:
Advocates Aryak Dutta and Amit Sharma, for the Appellant/ Department
Advocated Abhratosh Majumder and Alisha Das, for the Respondent/ Taxpayer