I.T.AS. NOS. 4658/KB AND 4659/KB OF 1986-87 VS I.T.AS. NOS. 4658/KB AND 4659/KB OF 1986-87
1997 P T D (Trib.) 195
[Income-tax Appellate Tribunal Pakistan]
Before Hamidullah Malik, Accountant Member and Tahseen Ahmed Bhatti, Judicial Member
I.T.As. Nos. 4658/KB and 4659/KB of 1986-87, decided on 16/04/1996.
Income Tax Ordinance (XXXI of 1979)---
----S. 13(1)(a) & Second Sched., Part I, Cl. (119)---Industrial undertaking-- Exemption from tax---Company---Deemed income---Allegation of unexplained credits---Addition ---Validity ---Assessee-company was in a formative stage and the factory was under construction---Company had never been assessed to tax in the past and its future income from the present source was exempt from tax---Persons who had-advanced loans and contributions towards equity participation were the members of one family and were Directors and major shareholders of the company---All such persons were tax-payers whose record was available with the department in the same city and their identity was well-established---Such persons never disowned the fact of making advances to the company ---Assessee was a private company maintaining proper books of account which was subject to audit---Entries in account books regarding the receipt of loans and advances from its Directors/shareholders thus could not be considered as fictitious and a cooked up arrangement in order to hoodwink the department---Held, in presence of such detailed particulars of the Directors/shareholders, it could not be said that the assessee-company failed to offer satisfactory explanation regarding the "nature" and "source" of the credits appearing in its books---would, thus, be a very unreasonable assumption that the assessee-company was trying to introduce its untaxed income on its books through a subterfuge---Assessing Officer, therefore, was not justified to draw an adverse inference against the assessee-company and to tax the alleged unexplained credits in its hands---In case the Income Tax Officer was not satisfied with the sources from where the Directors/shareholders made investments in the company it was against the Directors/shareholders concerned that the Income Tax Officer should have proceeded under S.13(1)(a) of the Income Tax Ordinance, 1979 and not against the company.
Marayandas Kedardath v. CIT Central (1952) 22 ITR 18: CIT v. Daulat Ram Rawalmall (1973) 87 ITR 349; M/s. Dhanrajmal Manumal & Sons v. CIT (West), Karachi; 1985 PTD 433 and M/s. Orient Trading Co: Ltd. v. CIT (Central), Calcutta (1963) 49 ITR 723 ref.
Basharatullah, D.R. for Appellant.
S.M. Tanuli for Respondent.
Date of hearing:. 19th March, 1995.
ORDER
The appeals at the instance of the department are directed against the consolidated order, dated 7-2-1987 passed by A.A.C.,-Range-D, Karachi, contesting his action of deleting additions, under .section 13(1)(a) of the Income Tax Ordinance.
2. Relevant facts of the case are that the assessee-company had started the business of manufacturing of paper bags. Return was filed declaring 'nil' income as the factory was under construction at Hubb Chowkli, District Lasbella and production had not yet been started. The income of the company was also claimed to be exempt from tax under clause (119) of the Second Schedule to the Income Tax Ordinance. During assessment proceedings, the I.T.O. noted that the following Directors/Shareholders had given loans and advances against equity participation to the assessee company.
| S.NO | Names | Share-holding | Loans Rs | Advance against equity participation | N.T.N/ place of assessment |
| 1. | Mian Muhammad Akhtar | 25,000 | 9,31,500 | | Circle Cos A-1 Karachi |
| 2. | Mian Vaqar Akhtar | 25,000 | 9,31,500 | 27,71,660 | Circle W-7 Karachi.N.T.N. 10-43-2502631 |
| 3. | Mian Nisar Akhtar | 25,000 | 9,31,500 | 15,97,300 | Circle W-7 Karachi N.T.N. No 10-43-2502630 |
| 4. | Mian Absar Akhtar | 25,000 | 9,31,500 | 1,34,160 | Circle W-7, Karachi N.T.No.10-43-2502629 |
| 5. | Mrs. Kaneez Akhtar | 25,000 | 9,31,500 | 3,94,300 | |
| 6. | Mrs. Ismat Vaqar | 25,000 | 9,31,500 | 2,13,130 | Circle W-7, Karachi N.T.No.10-43-2502632 |
| 46,57,500 + 63,25,000 =1,09,82,500 |
2. TheAssessing Officer asked the abovementioned Directors/Shareholders to file explanation regarding the sources of their investment in the loans and advances made to the company. They explained that the abovementioned investments were made out of loans obtained from Mian Muhammad Akhtar who was claimed to have sold jewellery weighing 5,100 tolas for Rs.1,12,00,000 in the accounting periods relevant to Assessment years 1981-82 and 1982-83. Then the Assessing Officer turned towards Mian Muhammad Akhtar and asked him to prove the availability of jewellery and its sale and also to file the names and addresses of the jewelers to whom the jewellery was allegedly sold. On further probe, the Assessing Officer reached the conclusion that the said Mian Muhammad Akhtar never possessed so much of the jewellery and that the alleged sale of jewellery was a fake and fictitious transaction. Consequently, the amount of loans and advances made to the assessee company by its shareholders were held to be not proved as the very source of the funds from where they had claimed the arrangement was unproved. The entire investment on account of advances against equity participation as well as loans was, therefore treated to be unexplained cash credits introduced in the books of the company.. The same were deemed as income of the assessee company under section 13(1)(a) of the Income Tax Ordinance. Similarly, in Assessment year 1983-84. The accretion of Rs.3,90,823 in the balances of abovementioned loans and advances of the Directors/Partners was treated as assessee company's income under section 13(1)(a) of the Income Tax Ordinance on account of unexplained cash credits. There being no other source of income of the company, the deemed income on account of unexplained cash credits of Rs.1,09,82,500 and 3,90,823 were treated as total income of the assessee in Assessment years 1982-83 and 1983-84 respectively.
3. The assessee contested this action of the department in appeal before learned A.A.C. The main objection of the assessee was that the Assessing Officer had grossly erred in invoking the provisions of section, 13(l)(a) of the Ordinance in the case of assessee-company instead of its creditors i.e. the Directors/Shareholders. Following arguments were advanced on behalf of the assessee at the first stage of appeal:
"If the facts of the present case are considered by referring to the provisions of section 13(1)(a), it would be clear that these provisions cannot be applied to the present case, as the assessee company did offer proper explanation for the investment made by its directors. The explanation offered by the company is quite satisfactory in the eye of law as the directors who are existing assessees do admit that they had made these advances out of sources available with them.
Since the directors admit that they have made these investments, how it can be assumed that instead of directors, the company itself, which has not yet started its business, is having income from undisclosed sources. Quite obviously in the facts and circumstances of the case, it cannot be assumed that the company had some undisclosed source. Thus there was no reasonable course open for the learned Income tax Officer, therefore, to proceed against the company.
The provisions of law are quite clear that if the assessee (in the present case the company) cannot explain the "nature and source" of any sum, only then such sum can be added back. Normally the cases falling under this category would be those e.g., any assessee has shown a sum received from some persons, whose existence or presence cannot be proved by the assessee or if the person concerned himself denies to have paid the sum to the assessee concerned. In the present case the directors are existing assessees and they not only claim that they have made these investments but they do possess the necessary evidence for the investment made. Under these circumstances the learned I.T.O. has arbitrarily made the additions as undisclosed income of the company.
It may be mentioned here that the I.T.O. appears to have made the additions as an after-thought, because in his letter 1Vo.Cos. Cir.A-1/1984-85/352, dated 5-12-1984 addressed to the company while asking for explanation and support for investment he had himself stated that in the absence of justification these investments would be 'added in the income of the shareholders/directors and added/treated this investment as income of the shareholders/directors for the Assessment years 1982-83 and 1983-84 and will be assessed accordingly. Thus it will be evident that the I.T.O. subsequently changed his mind and made the addition in the case of the company without any justification whatsoever.
I am instructed to state that not only in complete disregard of the provisions of section 13(1)(a) the I.T.O. added back the directors' investment in the case of company, when the I.T.O. himself was holding jurisdiction over directors' cases who were claiming with full responsibility that source for advances were entirely available with them but he also ignored to properly deal with the factual position with regards to source of investment and their income-tax, wealth tax assessments as well as wealth statements, sources of investment in jewellery and sale thereof. Consequently by summarily brushing aside the submission, he had treated the entire investment as unexplained income of the Company.
We are supported in our submission by the following two decisions:
(i)Marayandas Kedaidath v. C.I.T. Central (1952) 22 I.T.R. 18
(ii)C.I.T. v. Daulat Ram Rawalmall (1973) 87 I.T.R. 349
Photocopies of both these judgments are enclosed herewith. In these two cases under similar circumstances the Judges opined that the I.T.O. had no right to proceed against the case of firm when the amount appearing in the firm's book was claimed to be belonging to a partner or other person. Thus it was held that such amounts would not have been added in firm's cases.
From the above judgments of the superior Courts of India it will be observed that the material question to be determined is as to whether the money introduced in the books of accounts actually belongs to the company or to the directors who advanced such amounts. In the present case it is a quite admitted fact that the money does not belong to the company but the same was given by the directors /shareholders and the directors/shareholders concerned do admit that the amounts were invested by them.
Thus it is proved beyond any doubt that provisions of section 13(1)(a) cannot be invoked in the assessment of the company by any stretch of imagination."
4. The learned A.A.C., while accepting the abovementioned arguments of the assessee. deleted additions on account of unexplained cash credits in both the years with following observations:---
"I have considered the I.T.O.'s contentions vis-a-vis those of the learned counsel for the appellant and am of the view that the legal plea taken by the learned counsel carries much weight, particularly because it is supported by the case-law where the principle of law has clearly been laid down that the addition of at all is made it can be made in the case of person who claims to have advanced the money of any other person, firm or company. By pointing out the person concerned, who claims to have made the investment, the firm or company etc. have discharged the onus lying on them and the Income Tax Department cannot proceed against the firm or company even if the person who claims to have made the investment has no available sources for making the investment in question. The assessee-company did offer proper explanation for the investment that the same was made by the known and existing Directors/ Shareholders of the company and these Directors/Shareholders do admit that they made investment out of sources available with them, and in case the I.T.O. was not satisfied with the sources from where the Directors/Shareholders made investment in the Company, it was against the Directors/Shareholders concerned that the I.T.O. could have proceeded under section 13(1)(a) and not against the company. The Assessing Officer has clearly erred in invoking the provisions of section 130)(a) in the case of company. Thus the additions of Rs.1.09.82.500 and Rs.3,90,823 in both the years respectively are not sustainable in the eye of law and hence the same is hereby deleted in both the years."
5. The department has come up in the instant appeals against this decision of learned A.A.C. The learned D.R. contended that deletion of additions on account of unexplained cash credits and consequent cancellation of assessment orders by the A.A.C. was not justified. According to him, existence of a taxable source of income was not necessary for making the addition under section 13. That an advance for equity share was also a kind of loan because it could be withdrawn at any time. That unlike the cases of partners of firm, the unexplained loans and advances for shares received from shareholders could be taxed in the hands of the company and not in the hands of the individual shareholders. That if any sum is found credited in company's accounts and its source is not explained satisfactorily, it is taxable in the hands of the company and the department need not pursue the person in whose favour of the credit stands in the books.
6. The learned A.R., in addition to his arguments given at the stage of first appeal, submitted that the words 'unexplained cash credit' as used in section 13 of the Ordinance meant that either the person in whose name credit stands is totally fictitious or that person denies having advanced the money or he does not possess means to advance the money. That all the shareholders/directors, except one lady, are regular taxpayers and their N.T.Ns and Circles of assessment were mentioned in the assessment orders of Mian Muhammad Akhtar for Assessment years 1980-81 to 1983-84 in which possession of jewellery and advancing of loans to the above noted persons was duly declared and assessed. A copy of I.T.O.'s notice under section 13 dated 11-12-1984 was also produced by the A.R. in which the I.T.O. had indicated his intention to treat the unexplained amounts as income of the abovementioned shareholders/directors. The learned A.R. finally submitted that decision of learned A.A.C. was in accordance with plethora of case-law on the subject.
7. We have carefully considered arguments of both the sides and find ourselves in agreement with the contention of the learned A.R. In the present case, the persons who have advanced loans and contribution towards equity participation are the members of one family. They are the Directors and major shareholders of the Company. Moreover, they are the taxpayers whose record is available with the department in the same city. Their identity is, therefore, well-established. They never disowned the fact of making advances to the Company. The department, therefore, could not claim that the Company was trying to shift her burden to other persons in order to avoid the incidence of tax in its own case. Legally, the Company and its' Directors/Shareholders are different persons. The assessee is a Private Company maintaining proper books of account which are subject to audit under the Company Law. The entries regarding the receipt of loans and advances from its Directors/Shareholders, therefore, cannot be considered as fictitious and a cooked-up arrangement in order to hoodwink the department. In the presence of such detailed particulars of the Directors/Shareholders, it could not be said that the assessee Company failed to offer satisfactory explanation regarding the 'nature' and 'source' of the credits appearing in its books. The assessee-Company is in a formation stage and the factory 151 under-construction. It has never been assessed to tax in the past. Its future income from the present source would be exempt from tax. It would, therefore, be a very unreasonable assumption that the assessee-Company was trying to introduce its untaxed income in its books through a subterfuge. Hence the Assessing Officer was not justified to draw the adverse inference against the assessee company and to tax the so-called unexplained credits in its hands. Hence we confirm the decision of the learned A.A.C. that in case' of the Income Tax Officer was not satisfied with the sources from where the Directors/Shareholders made investment in the Company, it was against the Directors/Shareholders concerned that the Income Tax Officer could have proceeded under section 13(1)(a) and not against the Company.
8. Our view finds further support from the judicial observations in the following reported cases on the subject:---
"M/s. Dhanrajmal & Sons v. C.I.T. (West), Karachi 1985 PTD 433:
As it was the department which claimed that the amounts belonged the applicant even though they are standing in the names of various parties the burden lay on the department to prove that the applicant was the owner of the amounts despite the fact that the credits were in names of various parties. A simple way of discharging the onus and resolving the controversy was to trace the source and origins of the amount and find out its ultimate destination. So far as the source is concerned, there is no material on the record to show that the amounts came from the coffers of the applicant."
M/s. Orient Trading Co. Ltd. v. C.I.T. (Central) Calcutta (1963) 49 I.T.R. 723:
If the credit entry stands in the name of the assessee's wife and children, or in the name of any other near relation, or an employee of the assessee, the burden lies on the assessee though the entry is not in his own name, to explain satisfactorily the nature and source of that entry.
If the entry stands not in the name of any such person having a close relation or connection with the assessee, but in the name of an independent party, the burden will still be upon him to identify that party and to satisfy the I.T.O. that the entry is real and no, fictitious. When however, in a case where the entry stands in the name of a third party, the assessee satisfies the I.T.O. as to the identity of the third party and also supplies such other evidence which will show, prima facie, that the entry is not fictitious, the initial burden which lies on him can be said to be discharged by him. It will not thereafter be for the assessee to explain further how or in what circumstances the third party obtained money and how or why he came to make a deposit of the money with the assessee: The burden will then shift on to the department to show why the assessee s case cannot be accepted and why it must be held that the entry though purporting to be in the name of a third party, still represents the income of the assessee from a suppressed source. In order to arrive at such a conclusion, however, the department has to be in possession of sufficient and adequate material. "
8-A. In the light of discussion in the foregoing paragraphs, we have no hesitation in confirming the deletion of addition under section 13(1)(a) and consequent cancellation of assessment orders for both the years. Accordingly, we dismiss both the departmental appeals.
M.B.A./229/T Appeals dismissed.