The Hindu Business Line : An officer on the trail of 20 vanishing shareholders

WE HAVE seen quite a few vanishing things, such as creams, convicts and companies. But the Modern Cement Industries Ltd case that has appeared in a recent issue of Income-tax Tribunal Decisions is about vanishing shareholders.

First the story: The company was incorporated in 1991 and commenced commercial production of cement from 1992 with an installed capacity of 35 tonnes per day. Its capital of Rs 5 crore was made of about 10 lakh shares allotted by private placement, and the balance offered to the public.

The assessing officer (AO) noticed that the company showed Rs 98,99,300 as amount received from 373 applicants, through private placement of promoters' quota. From particulars of allottees provided by Modern, the AO picked up 50 names for further enquiry.

Thirty of these persons "confirmed the investment", but she found that the balance 20 allottees, who had all given the same address, were missing.

The AO found that none of the 20 ever resided or worked at the stated address. The amount they had invested, at Rs 10,000 each, totalled to Rs 2 lakh; and the AO added this amount to the income of Modern because it was from `undisclosed sources'.

Since the company was able to provide confirmation from investors only to the extent of Rs 39,43,300, there was a total addition of Rs 59,56,000.

At the appeal stage before the Commissioner, the company submitted "evidence in support of genuineness of the share application money received from the allottees of the preferential quota" and explained that the shares under the AO's lens had been allotted through a brokerage firm operating from the address where the AO enquired at. CIT (A) deleted the addition made by the AO.

This made the Revenue unhappy, and so, it approached the Ahmedabad Income-tax Appellate Tribunal (ITAT).

The Department's counsel argued that the company had not produced the evidence before the AO, and that the CIT (A) had erred in entertaining additional evidence given by the company.

But Modern's counsel said that the AO had not made any adverse comments "in her written submissions" before the Commissioner. Modern also argued that merely because the address was of the broker, it couldn't be said, "the allottees are non-genuine or fictitious entities".

ITAT's Accountant Member, Mr T. N. Chopra, reasoned:

"The amplitude of the discretion vested with the CIT (A) would extend to admit additional evidence which would fill up the gaps or some obscurity or lacuna in the evidence already available on record."

He felt that the AO had done enquiries "at the back of the assessee" and "hastily jumped" to the conclusion about fictitious entities, without examining the share broker whose address was given by the 20 allottees. It was not logical to allow the commission paid to that broker, while treating the investments as non-genuine.

So, Mr Chopra deleted the addition of Rs 2 lakh, saying that the AO's conclusion in that regard was "without substance".

What about the balance addition of about Rs 57 lakh? There too, Mr Chopra was of the view that the company had produced the share application forms, and also the return of allotment filed with the Registrar of Companies. With "373 allottees spread all over the country", it was not necessary for the AO to insist "that share certificates (?) have not been produced", said Mr Chopra, upholding the CIT (A)'s order. However, the Judicial Member, Mr T. K. Sharma, had a different view. He said that there was new evidence that the company produced before the Commissioner, so it would be right if the AO looked at the matter afresh, after giving an opportunity of being heard to the assessee. Because of the difference of opinion between the two members, it was necessary for the Third Member, Mr R. P. Garg, Vice President of ITAT, to give his opinion on the issue. He pointed out how some of the share application forms did not have signatures; perhaps the CIT (A) had "wrongly assumed that all the forms were signed".

Also, "investment through broker does not seem to be probable," he said because this was a case of private placement. Ultimately, he ruled that the Commissioner's order be set aside so that the AO could decide the issue again. In the course of all these years, it is probable that more people would have vanished, and a similar fate befallen on papers as well.

Tailpiece

"Doctor, I've lost my sleep, and even pills don't help!"

"Did you try reading tax cases to get drowsy?"

"Do you want me to lose my peace too, Doc!"

Detaxification@TheHindu.co.in

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