Karnataka H.C : The creditworthiness of the shareholders would stand proved by identifying the shareholders and recording their consenting statement without any proof to show their creditworthiness

High Court Of Karnataka

CIT vs. Arunananda Textiles (P.) Ltd.

Assessment Year : 1996-97

Section : 68

K.L. Manjunath And B.V. Nagarathna, JJ.

IT Appeal No. 1515 Of 2005

March 2, 2010

JUDGMENT

K. L. Manjunath, J. – The Revenue has come up in this appeal being aggrieved by the order passed by the Commissioner of Income-tax, which has been affirmed by the Income-tax Appellate Tribunal, Bangalore in I.T.A. No. 1030/Bang/2002 dated September 30, 2004 raising the following substantial questions of law :

“(1) Whether the appellate authorities were correct in holding that the creditworthiness of the shareholders would stand proved by identifying the shareholders and recording their consenting statement without any proof to show their creditworthiness ?

(2) Whether the appellate authorities were correct in recording a finding that the shareholders were genuine and therefore their credit-worthiness would stand proved without examining or relying on any evidence to substantiate such a claim and consequently recorded a perverse finding ?

(3) Whether the Tribunal was correct in holding that the order passed by the first appellate authority dated April 23, 2002 was correct despite the appeal having been filed on March 22, 2002 and no proper opportunity being given to the Revenue to substantiate their case and without recording a proper finding regarding the validity of reopening of assessments ?”

2. We have heard the learned counsel for the parties.

3. The assessee is a company carrying on the business as a spinning mill. For the assessment year 1996-97, the return of income was filed declaring nil income. The Assessing Officer while passing an order of assessment noticed that certain amounts were deposited by the third parties in the assessee-company and that those deposits were unexplained cash credits. Therefore, notice under section 148 of the Income-tax Act was issued and the entire amount of share deposits was brought to tax in the hands of the assessee.

4. The assessee filed an appeal before the Commissioner of Income-tax (Appeals), Bangalore and on March 8, 2000, the order was passed by the Commissioner allowing the appeal and set aside the assessments and remitted the matter back to the Assessing Officer to pass an order afresh. On remand, though the assessee was able to identify the shareholders by the persons who deposited as shareholders, still the Assessing Officer brought the said deposits to tax by the order dated February 27, 2002. Aggrieved by the same, the assessee filed an appeal before the Income-tax Appellate Tribunal, which appeal came to be allowed. Therefore, the present appeal is filed.

5. The short question that arises for our consideration in this appeal is :

“If the company has received share amount from the intending shareholders, is it required for the respondent-assessee to identify and establish the creditworthiness of the depositors.”

6. The question raised in this appeal is squarely covered by several judgments of the Supreme Court and also the judgment of this Court passed in CIT v. ASK Bros. Ltd. [2011] 333 ITR 111 wherein this Court following the judgments of the Supreme Court in the case of CIT v. Lovely Exports (P.) Ltd. [Application No. 11993 (SC) of 2007, dated 11-1-2008] and also in the case of CIT v. Steller Investment Ltd. [2001] 251 ITR 263/ 115 Taxman 99 (SC) has ruled that it is not for the assessee to place material before the Assessing Officer in regard to the creditworthiness of the shareholders. If the company has given the addresses of the shareholders and their identity is not in dispute, whether they were capable of investing, the Assessing Officer shall investigate. It is not for the assessee-company to establish but it is for the Department to enquire with the investors about their capacity to invest the amount in the shares. Therefore, we are of the view that the substantial questions of law framed in this appeal are to be answered against the Revenue and in favour of the assessee. Accordingly this appeal is dismissed.

[Citation : 333 ITR 116]

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