Written By :
Karunesh Mittal, Chartered Accountant, India
has been the ongoing debate on the applicability of the Section 68
of the Income Tax Act, 1961 to the sharecapital introduced in the
company with respect to the two landmark decisions of the Indian
Judiciary - CIT Vs.
Stellar Investment Limited 164 CTR 287 (SC) and CIT Vs. Sophia
Finance Limited (1993) 205 ITR 98 Delhi (FB). It has been the
decision of the Honourable Supreme Court in the case of the CIT
Vs. Stellar Investment Limited (1991)
192 ITR 287 Delhi that ha triggered this debate in the lobbies of
the Chartered Accountants and the Tax Consultants. It is widely
believed that the upholding of the decision of the High Court by
the Supreme Court in case of the Stellar
Investment Limited has the effect of reversing the decision of the
High Court in case of the Sophia Finance Limited.
In my opinion the two decisions
are similar and identical on the thought and intent of the
legislature but are two materially different in their approach.
The Supreme Court in its decision of the Stellar Investment
Limited has only upheld the decision f the High Court stating that
there was no question of law in the case and only question of fact
exists which is to be decided by the Tribunal.
The Supreme Court in its decision has not analysed any other
aspect of the decision of the High Court.
Now the question rests on the decisions of
the High Court in the two cases. The High Court in the case of
Stellar Finance Limited (1991) 192 ITR 287 Delhi stating its
intention had in brief remarked
" It is evident that even if it be assumed that the
subscribers to the increased share capital were not genuine,
nevertheless, under no circumstances, can the amount of
sharecapital be regarded as the undisclosed income of
the assessee. It may be that there are some bogus shareholders in
whose names the shares have been issued and the money may have
been provided by some other persons. If the assessment of the
persons who are alleged to
have really advanced the money is sought to be reopened, that
would have made sensebut we fail to understand as to how this
amount of increased share capital can be assessed in the hands of
the company itself."
The basic intention of the High Court was to punish the guilty.
You cannot punish somebody else where the crime is of another. The
above text denotes that the only liability of the AO is to
identify the shareholders. If he believes or has proof that
actually the money has not been advanced by these share holders or
has been advanced by the persons identified in the name of other
persons then he should proceed against the people who have
actually advanced the money. Further the appeal was against the
Tribunal's Observation that there was no question of law. The
court was giving its decision on whether there is question of law
involved or not and only expressed the intention and thought of
law in general without referring to the provisions of Section 68
of the Income Tax Act, 1961.
The high court in the case
of the Sophia Finance Limited having again received the petition
on the same grounds analysed in detail its decision of the Stellar
Investment Limited in conjunction with the provisions of the
Section 68. The decision of the High Court in this case was
significant for the number of issues considered while arriving at
this decision. The issues that have ben considered are:-
1. What is the information that can be provided by and expected
from the company in relation to the shareholders or the persons
who have subscribed to the sharecapital of the company?
2. Whether the Section 68 is attracted where the credits are in
the form of the share capital or shar application money?
3. When the onus of the assessee stands discharged in the case of
the credits in the form of share capital?
The judgement in itself considered and also noted the observance
of the Tribunal with regard to the decision in the case of
Standard Cylinders Private Limited Vs. ITO (1988) 24 ITD 504. The
company cannot seek information from the shareholders for the
source of their investment and it shall be asking the company do
the impossible where it is expected to provide such details and be
held liable for not providing such details.
As regards the applicability of the Section 68 the High Court
clearly stated that the Section 68 is applicable to such credits
in the form of Capital of the company. Section 68 of the Act
clearly permits the Income Tax Officer to make enquiries with
regard to the nature and source of any or all the sums credited in
the books of accounts of the company irrespective of the
nomenclature or the source indicated by the assessee.
The High Court then
did make the observation with regard to the extent of the onus of
the assessee. The income tax officer should enquire in to the fact
that the shareholders do in effect exist or not. If they exist no
further enquiry should be made. In case they do not exist then the
assessing officer can invoke section 68. Meaning there by that the
onus of the assessee where it claims that the monies have come as
the share capital in the company is to the extent limited to prove
that the transaction is a genuine one and the existence of the
such share holder. But he cannot be asked to explained the source
of the monies with the shareholder.
Even the Honourable High Court in
the case of the Sophia Finance Limited clearly remarked that their
decision in this case is not in conflict with the Decision in case
of the Stellar Investment Limited. The bench deciding the case of
the Sophia Finance stated that the Observations in the case of the
Stellar Investment Limited cannot mean that the Income Tax Officer
cannot or should not go into the question that the shareholders
actually existed or not. If the shareholders are identified and it
is established that they have advances the money then the monies
received should be regarded as the capital receipt and to that
extent the observations in the case of Stellar Investment Limited
are in consonance with the decision in the case of the Sophia
Finance Limited. Thus the two decisions have approached to the
same conclusion in the different ways where
as they intended to convey the same intent and thought of the
The views expressed are completely on the academic basis and on
the individual interpretation of law.
You may also contact the author for any query concerning this article
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