I. T. A. No. 1545/LB of 2003, decided on 2nd November, 2003. VS I. T. A. No. 1545/LB of 2003, decided on 2nd November, 2003., 2004 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 880 (2003)

(a) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 13(1)(aa)‑‑‑Addition‑‑‑Identification of source‑‑‑Identification of source is an important condition for coming to the conclusion with regard to its addition in respect of provisions of S.13(1)(aa) of the Income Tax Ordinance, 1979.

2003 PTD 1040 rel.

(b) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 13(1)(aa)‑‑‑Addition‑‑‑Where Directors of company come forward and say that they had made the investment it should not be added in the hands of the company.

(c) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 13(1)(aa)‑‑‑Addition‑‑‑Principle‑‑‑Addition could only be made after determining the source from which such funds emanated.

2003 PTD 1040 rel.

(d) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 13(1)(aa)‑‑‑Addition‑‑‑Company‑‑‑Share deposit money‑‑‑Foreign remittances‑‑ Certificate of foreign remittance was found to be fake‑‑‑No business of company‑‑‑Addition in the hands of company without identification of source of company‑‑‑Validity‑‑‑Identification of source factually and logically routes through the Directors who had floated such company through proper documentation and had introduced investment‑‑‑Fact that their documents were found not satisfactory, did create a reasonable doubt about their source, but not against the company, a legal person, which had started business after incorporation and had not done any trading or manufacturing and such source could not be identified as from some transaction done by the company.

(e) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 13(1)(aa)‑‑‑Sale of Goods Act (III of 1930), S. 2(7)‑‑‑Addition‑‑ Share deposit money‑‑‑Stocks‑‑‑Responsibility for explaining the source of such money was on the Directors‑‑‑Share deposit money was payment against purchase of shares, which was a sale transaction‑‑ Such transaction was covered under the definition of goods‑‑‑Shares undoubtedly were stocks of the Company and payment made by the Directors for their purchase was a sale transaction‑‑‑Directors of the Company had deposited the requisite amount for purchase of shares of the Company‑‑‑Same was a proper share capital and not mere deposit or advance‑‑‑Money having come to the coffers of the Company the formalities of the contract from the side of Directors under S.5 of the Sale of Goods Act, 1930 stood completed‑‑‑Section 2(7) of the Sale of Goods Act, 1930 includes `shares' in the definition of `goods'‑‑‑When it was a case of transaction between a buyer and seller of sales of goods then the responsibility would shift to the vendor to show as to wherefrom he had got the funds for purchase of such, goods‑‑‑Directors had deposited share deposit money for purchase of stocks (shares) of company and were responsible for explaining the source.

(f) Sale of Goods Act (III of 1930)‑‑‑

‑‑‑‑S: 4‑‑‑"Sales" and "agreement to sell"‑‑‑Where the seller transfers or agrees to transfer the property to the buyer for a fixed price, the contract is complete.

(g) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 13(1)(aa)‑‑‑Addition‑‑‑Company‑‑‑Share deposit money‑‑‑Foreign remittances‑‑ Certificate of foreign remittance was found to be fake‑‑ Addition in the hands of company‑‑‑Validity‑‑‑Amount could not be added in the hands of assessee‑company even if the amount so claimed to be share deposit money was not supported by valid source‑‑ Identification of the amount to the extent of contribution by Directors stood evidenced and its addition in the head of company was disapproved‑‑‑Case was set aside by the Appellate Tribunal for review of various documents produced before it earlier and further explanation by the assessee.

1985 PTD 433; 1997 PTD (Trib.) 195; 1997 PTD (Trib.) 1184; 2003 PTD 1040 and 1973 PTD 375 rel.

(h) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 52‑A & 86‑‑‑Recovery from the person from whom tax was not deducted or collected ‑‑‑Assessee in default‑‑‑Parameters‑‑‑Appellate Tribunal had determined certain parameters for holding the assessee as "assessee, in default"‑‑‑Identification of suppliers, payment of taxes by recipient of the amount, purchase less than the threshold and such other factors had to be highlighted before holding the assessee in default.  

2002 PTD (Trib.) 2210 rel.

Shafqat Mehmood Chohan and Abdul Quddus for Applicant.

Muhammad Asif, D.R. and Shahid Jamil Khan L.A. for Respondent.

Date of hearing: 6th August, 2003.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑The petitioner‑assessee assails addition and partial modification under section 13(1)(aa) made by the Assessing Officer and confirmed by the CIT(A).

Brief facts leading to this appeal are that the assessee installed a textile mill. During the impugned assessment year some production was made but was kept in stock and was not sold. During the course of proceedings the Assessing Officer found that the assessee has shown difference of Rs.10,53,38,664 in the share deposit money. The amount introduced during the year statedly belonged to Mr. Shah Faisal and Mr. Muhammad Ayub, Directors of the Company out of foreign remittances received by them at Rs.14,65,56,588 and Rs.3,41,02,000 respectively. This figure of addition was supported by a certificate in terms of foreign remittance which later on was found to be fake as the Bankers denied issuance of the same and the learned Assessing Officer made addition amounting to Rs.17,46,58,588 under section 13(1)(aa) being the figure mentioned on the certificate furnished by the assessee. Before CIT(A) assessee stand and its reply was as follows:‑‑

(1) That the certificate is not bogus and the Bank because of non availability of old record has not been able to locate the files.

(2) That the accounts are further supported through the Bank statements.

(3) That this amount is identified as share deposit money which means it is given by the Directors of the Company hence its addition in the companies account is not justified.

(4) That the legal requirements of addition under section 13(2) in terms of two notices and identification of the deemed income source, have not been fulfilled.

Supporting above propositions the learned A.R. first of all said that the company though is a legal person but in any case it is not human being. It is run by a management of which the most important is the Board of Directors. The finances are routed through the said Directors hence if any explanation is required it should be the Directors who should be summoned and be charged for said investment. Referring 1985 PTD 433 in the case of Dhanrajmal Manumal and Sons v. Commissioner of Income Tax (West), Karachi it was pointed out that on point of cash credit burden lays on the Department to prove that the assessee was owner of the amount despite the fact that credits were in the name of different known parties and Department had power to make such parties appear before it. He said that the situation in this case is more apparent. Not only that the amount has been so disclosed as the share deposit money invested by the Directors but also that the certificates support the said contention. The status of the certificate, be that correct or incorrect, the claim remains that the amount has been routed by the two Directors and is paid as share deposit money and it is they who are responsible to explain its source and not the company. Learned A.R. while arguing further said that it is not the issue as to whether the amount at the stage is from proper and verifiable sources or not. The issue is as to who is to explain the source? In the case of the Company when in the books of accounts a person is shown as Director and he admits having made investment in the Company the source stands explained to the extent of the company. As such, the burden now shifts to the shoulder of the one who has made the said investment. He remarked that in any case the status of the company is of a legal person and the Director is a living person in addition to being a legal person. It is not the company who has made this investment. Unless the company starts functioning only then the income starts coming to the coffers of the same. The law does not recognize any situation wherein during the incorporation period and functioning, the company can earn some deemed income from some identifiable sources. It is for the reason that the life of the said company starts from incorporation and only after said incorporation it can start its operation. The judgment referred by him was 1997 PTD (Trib.) 195, wherein .the learned Accountant Member, Mr. Hameedullah Malik speaking for the Bench gave following, observations:

"We have carefully considered arguments of both the sides and find ourselves in agreement with 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 the 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 is 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 inco0e 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 Company 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) and not against the Company."

He remarked that during the entire discussion before the Assessing Officer in reply under section 62 and before the First Appellate Authority the stand remained that this is an investment by the Director. The balance sheet also discloses the investment as, such and the probe in any case was to be made in their hands. The scheme of law, he said, which has been mentioned in the above noted judgment also supports his claim in unequivocal terms that it is the person who claims that he has advanced this money who should be probed and charged if does not satisfactorily responds.

In this regard further reliance has been placed upon 1997 PTD (Trib.) 1184 wherein Mr. Nasim Sikandar, learned Judicial Member as the then he was now Mr. Justice has held as follows:‑‑

"After the admission of the donor it was only him who was liable to be burdened with an addition of the kind and not the assessee. This being so, and the fact that the Revenue has not been able to distinguish the aforesaid reported decision of this Tribunal; we will allow the plea and direct that the impugned addition under section 13(1)(aa) shall stand deleted altogether".

It was also added that section 13(i)(aa) does not attract in the circumstances before us. It speaks of finding of an investment the source of which is not explainable while in this case the source is explained in terms of the contention of the two Directors that it is their money. Wherefrom did they get it or how it was generated is not an issue in respect of the assessment of this company. This company, he repeated, is in the formation stage in which there is no chance of earning, any income from any source whatsoever except for investment by the Directors/shareholders or the other resources arranged by the living persons for running the business of the said legal person. Furthermore, the assessee has not been issued with a notice under section 13 at all which alone is enough to hold that the addition is not to be maintained. Above all the assessee has not been confronted with the certificate issued by the Bank in which they have denied the claim of the assessee regarding their source of investment.

Learned D.R. on his turn said that burden of proving that the amount belonged to the Directors having not been discharged earlier there is no fun in claiming at this stage of the proceedings that they should be asked again. The amount has been reflected in the balance sheet of the company as belonging to the two Directors but when confronted to them through a notice under section 62 they failed to substantiate their claim that it was invested by them. He said that the addition made by the Assessing Officer has been reduced to the amount of difference between the previous investment as well as increase during the year hence relief due has already been allowed. Furthermore, the Directors having never come up earlier physically now cannot claim that it was their money. He brought our attention to page 2 of the order of the learned CIT(A) and said that the matter has been properly taken cafe of by the CIT(A). The company has failed to explain the nature as the documents have been held to be as fake. The same, therefore, has correctly been charged under section 13. The CIT(A) has further found that in the case of this company there is no receipt or encashment. Furthermore, the cases referred by the assessee have been distinguished for being not relevant with the facts and circumstances of the present case. Above all the company has not issued shares to the tune of the claim of the assessee. It is only for a sum of Rs.7,00,000 that the shares have been issued to the Directors. The amount having been directly routed to the account of the company for which there is no proper source, the D.R. remarked, it has rightly been added. He said that not only the Assessing Officer has taken cognizance of the arguments and have properly thrashed them out the same but have again been refuted by the First Appellate Authority. He brought our attention to following paras. of the order of the CIT(A):‑‑

"The manager allegedly did not deny the existence of Bank account in the name of the company and the account in the name of Shah Faisal that is FCCD 029‑7 and FC 353‑7, the copies of the respective Bank statements are enclosed herewith and the original Bank's statements are being produced for your kind perusal. These Bank statements were filed before the completion of assessment. The Bank statements witness the remittance of Dollars and withdrawal thereof which were shown in the Dollars in the respective accounts. In the presence of the Bank statements, the denial of certificate is of no effect.

The perusal of Bank statements of the two account shows that the amounts of US $ 316.969 was received in account No.CD‑29 (maintained in company's name) on 11-6‑1996 and the same was transferred in Dollars (US$ 316,8000) to another Account being No. CD-28 on 13‑6‑1996, the said account as per inquiry of the Assessing Officer belonged to Haji Maluk Khan, Haji Noor Jan.

The other amount of US$ 850,000 was received through FTT from another. Account No. CD‑20‑8 on 11‑2‑1997 was again sent as FTT on the very next day on 12‑2‑1997 without being encashed by the Assessee‑Company.

The Bank account statement of Accounts No. FCSB 353‑7 maintained in the name of Shah Faisal clearly shows that Foreign telegraphic transfer amounting to US $ 1369960 was credited on 22‑5‑1998 and 27‑5‑1998 and cash amounting to 1570100 US$ was deposited and profit of US$ 115518 had also been credited through three entries. The Bank statement shows that total credited amount through FTT, Cash deposit and profit (US$ 1369960 + 1570100 + 115518 ‑ 3055578) was withdrawn on 2‑4‑1999 which is much later than the closing date of income year of the assessee i.e. 30‑9‑1998."

The learned D.R. therefore, reiterated that firstly at no stage of the proceedings the two Directors have claimed that it is their money, secondly the facts mentioned by the Assessing Officer and repeated by us supra also make it clear that the amounts which had come to the coffers of the two Directors accounts were never withdrawn and none of their debit entry has any nexus with the investment made by this company in various accounts. He said that it is not enough for the A.R. to say that the Directors of the company had received amount in their account in terms of foreign remittance which is in multi‑million Dollars but the same from one account was transferred to some other person namely Mr. Maluk Khan etc. in the second account it remained there and was withdrawn after the end of this financial year which obviously means that the deposit ‑with this company was not from the said source. The amount, therefore, has remained unexplained in the hand of this assessee and law does not recognize any distinction between a legal person or a living person. This investment had neither proved to be as share deposit money from the circumstances nor contribution by the so -called Directors of the company. The entire arguments revolve around the presumption that the Directors of the company had sent foreign remittance from Dubai as their share capital which later has been proved to be as bogus. Moreover, the refuge claimed through the Bank account has also been proved to be as un‑genuine as during the period under discussion no amount was withdrawn from the said account. The facts of the case, therefore, in his opinion hold in unequivocal terms that this case is not of investment by the two Directors but is a case where section 13 comes into operation in full force against assessee company.

We have given earnest consideration to the arguments of the two sides and have gone through the case‑law on the subject. In this case the attitude of the assessee with regard to filing of a certificate does create a very strong doubt about his style. The Directors have not been able to prove the bona fide of the remittance by them. However, their claim that this is their investment and that the amount is a share deposit money advanced by two of them cannot simply to ignored. The objection of the D.R. that the two Directors have never stated at any stage that this amount has been transferred by them and that it belongs to them is of no help, is not convincing. This is a public limited company registered with the Registrar Joint Stock Companies. At the time of incorporation the said two persons have been registered as its founder Directors. Moreover, it was claim of the two Directors that they have remitted money from abroad which certificate statedly has been proved to be as unidentified by the Bank. Above all this amount in the Banks as well as in the balance sheet has been shown as deposit for share. So saying that the Directors do not claim it to be as their investment is not correct. The identification of the source, therefore, is evident. The Department has correctly appreciated the Bank accounts and their entries but again these Banks accounts belong to the two Directors. Obviously same were produced and discussed in the backdrop of the claim that the investment has been made by the two Directors. Converse to this position the Department does not have any argument to say that the amount can be identified as un‑explained source of the company under any other form. This is first year of company business after incorporation and no transaction in any shape whatsoever has been made It is correct that section 13 does not require any such condition for its application, however, the identification of the source is an important condition for coming to the conclusion with regard to its addition in the respective provisions of section 13(1)(aa). In this regard a recent judgment of the High Court reported. 2003 PTD 1040 can be referred with advantage. The facts of the same and the ratio decidendi is as follows:‑‑

EXPLANATION REGARDING SOURCES CANNOT BE REJECTED WITHOUT ADDITION IN THE HAND OF DIRECTOR. Company purchased the property vide registered deed, dated 10‑7‑1993. In the deed it was mentioned that advance money of Rs.2,500,000 was paid on 12‑6‑1993. Assessing Officer issued notice under section 56 calling for return of assessment year 1993‑94 which was filed declaring NIL, income and in the balance‑sheet the aforesaid amount was not shown. The Assessing Officer issued notice under section 13(1)(b) asking for explanation of sources of Rs.2,500,000. The company explained that the payment was made by the Directors and, not by the company. The Assessing Officer rejected the explanation and made the addition which was confirmed by the CIT(A) and the Appellate Tribunal. On reference the High Court deleted the addition on the basis that once the Company had identified the source namely the Director, the Assessing Officer must have stopped there to seek the reply of the Director. He could have reverted back to the Company only if the Director had contradicted the stand of the Company or otherwise they were found to have been not in a position to contribute that amount. Moreover, before making such like addition it is always desirable that the Assessing Officer identifies the source wherefrom the Company received the amount for the alleged investment."

From the above para it becomes very clear that where the Directors come forward and say that they have made the investment it should not be added in the hands of the company. Moreover, the identification of the source wherefrom company received the amount is again relevant. Applying this principle one recalls again that dais Company is not in business as yet. The Honourable High Court has further emphasized that such an addition can only be made after determining wherefrom these funds emanated. The relevant para is as follow:‑‑

"The learned Members of the Tribunal as well the First Appellate Authority in our view failed to consider the reply made by the assessee on 28‑11‑1995 which sufficiently explained the case of the assessee. If that reply had objectively been considered by the Assessing Officer, the First Appellate Authority as well as the Tribunal they would certainly have come to the conclusion that an addition under section 13(1)(b) of the late Income Tax Ordinance, 1979 was not possible .in the hands of the assessee‑Company. That kind of addition has possible only after the Directors of the company had either controverted the claim of the company to have contributed the advance payment or were otherwise found to be lacking in possession of sufficient funds to make the payment. At the cost of repetition it is pointed out that where a person or a company is not in any business and has no assets to justify the investment, then before making of addition of the kind the Assessing Officer must point out and identify the source wherefrom these funds emanated. And to follow the source where it is so possible."

Reverting back to 1985 PTD 433 the judgment decided by the Honourable High Court, Karachi holds that the destination of the amount must be determined in addition to the source. The Department in this case never enforced the Directors to explain their source of investment directly. The documents presented on their behalf have been found to be as incorrect and as per statement of learned A.R. the denial by the Bank has not been confronted to the assessee. The fact as to whether the amounts in question belong to the Directors is a statement of fact which could only be accepted or rejected by enforcing their presence specially when the Directors had made their effort through A.R. to explain the sources at their end. The fact, however, remains that the said Directors did best effort to justify their investment which obviously means that they never deny or controvert that this investment has not been made by them. We do not agree with learned A.R. that the evidence has been misled but still believe that without enforcing the presence of the two Directors straight addition of the amount as income 'of the limited company does not sufficiently satisfy the requirement of proving the onus. During the entire proceedings and at all stags the identification of the source factually and logically routes through the Directors who have floated this company through proper documentation and have introduces investment. The fact that their documents proved to be as not satisfactory does create a reasonable doubt about their source, however, not against the company a legal person which has started business after incorporation and has not done any trading or manufacturing whatsoever so as to make us believe that the same can be identified as from some transaction done by the company.

The case requires our indulgence from another angle. Share deposit money is payment against purchase of shares, which is a sale transaction. Such a transaction is covered under the definition of goods. Shares undoubtedly are stocks of the company and the payment made by the Directors for its purchase is a sale transaction. In many recent judgments the Honourable High Court has held that share deposit money is neither a loan .nor an advance. The Directors of this company have deposited the requisite amount for purchase of share of the company. It is a proper share capital and not mere deposit 9f advance. The money having come to the coffer of the company the formalities of the contract from the side of the Directors under Sales of Goods Act section 5 stand completed. Furthermore, section 2(7) of the Sales of Goods Act includes `shares' in the definition of `goods'. The sale and purchase of shares would, therefore, subject to any other law by the time being in force are governed by the provisions of said Act.

Furthermore, in section 4 of the said Act formalities of the contract of sale have been provided through Section‑I which says:‑‑.

"a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part only and another. As a consequence the sale of share is a contract between company and the purchaser as in the present case."

Taking que from the above provisions which say that where the seller transfers or agrees to transfer the property to the buyer for a fixed price, the contract completes.

The upshot of above discussion is that share deposit money is payment of the Directors and under Sales of Goods Act the transactions is complete. When it is a case of transaction between a buyer and seller of sales of goods then the responsibility would shift to the shoulder of the vendor as to where from he has sources the funds for purchase of the said goods. In this case obviously the Directors had deposited share deposit money for purchase of stocks (shares) of the company and are therefore, responsible for explaining the source.

While giving above findings we have before us support from the judgment of the Lahore High Court in the case of CIT v. Crescent Textile Mills Limited reported as 1973 PTD 375. The Honourable High Court while coming to the conclusion that the contract completes even‑ if the material goods is not transferred in compliance to the deposit and in his regard has taken support from section 20 of the Sales of Goods Act which speaks as follows:‑‑

"(20). Specific goods in a deliverable state.‑‑‑Where there, is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed."

The consensus, therefore, can only be on the option that the matter be referred back to the Assessing Officer for review of the various documents produced before him earlier and further explanation by the assessee. In this regard we will have no hesitation in holding that this amount cannot be added in the hands of the assessee‑Company even if the amount so claimed to be share deposit money is not supported by valid source. The identification of the amount to the extent of contribution by the Directors, therefore, stands evidenced and its addition in the head of the company is disapproved. However; the case is set aside and Assessing Officer is directed to proceed accordingly.

As regards additions on account of holding the assessee in default are concerned there is a lot of case law on the subject now and this Tribunal has determined certain parameters for the same. In this regard identification of the suppliers, payment of taxes by recipient of the amount, purchase less than the threshold and such other factors have to be highlighted before holding the assessee in default. Moreover, this Tribunal has also further discussed the implication of non‑deduction in terms of section 52(A) and section 86 in some of the judgments including 2002 PTD (Trib.) 2210. In view of the same we consider it more appropriate to set aside this issue also.

The assessee appeal, therefore, is allowed in the manner and to the extent mentioned above.

C.M.A./1067/Tax (Trib.) Order accordingly.