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The 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 analyzed 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 share capital 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 sense but 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 analyzed 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 share capital of the company?
2. Whether the Section 68 is attracted where the credits are in the form of the share capital or share application money?
3. When the onus of the assessee stands discharged in the case of the credits in the form of share capital?
The judgment 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 legislature.
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