2010 (5) TMI 62 - HC - Income Tax

Share application money - undisclosed income - During the course of assessment it was noticed by the Assessing Officer that the assessee had received Share Application Money amounting to Rs.27 lakhs from four private limited companies. On being called upon to prove the genuineness of the receipts the assessee furnished documents such as Share Application Money copies of resolution by the Board of Directors of the applicant companies as well as the bank statements Memorandums (2) the genuineness of the transaction namely whether it has been transmitted through banking or other indisputable channels; and (3) the creditworthiness or financial strength of the creditor/subscriber. It was observed that (a) if relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the shareholders register share application forms share transfer register etc. it would constitute acceptable proof or acceptable explanation by the assessee; (b) the Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices; (c) the onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the assessee nor should the Assessing Officer take such repudiation at face value and construe it without anything more against the assessee and the Assessing Officer is duty-bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and the veracity of the repudiation. - the Commissioner of Income Tax(Appeals) and the Income Tax Appellate Tribunal in our view were justified in holding that the identity of share applicants and the genuineness of the transactions had been established by the assessee.

Summary

Issues:
Appeal against ITAT order dismissing Revenue's appeal for Assessment Year 2002-03 regarding Share Application Money as unexplained cash credit under Section 68 of the Income Tax Act.

Analysis:
1. The appeal challenged the ITAT order dismissing the Revenue's appeal against the Commissioner of Income Tax (Appeals) decision regarding the addition of Share Application Money as unexplained cash credit under Section 68 of the Income Tax Act for the Assessment Year 2002-03.

2. The Assessing Officer added the Share Application Money as unexplained cash credit under Section 68 of the Act as the assessee failed to produce the parties before him, despite submitting documents such as Share Application Money, board resolutions, bank statements, and other relevant records to prove the genuineness of the receipts.

3. The Commissioner of Income Tax (Appeals) deleted the addition made by the Assessing Officer, noting that the genuineness of the payment made by the applicant companies to the assessee company had been prima facie established since the applicants were assessed to income tax, and their investments were reflected in their balance sheets.

4. The Income Tax Appellate Tribunal held that the assessee had discharged the onus placed upon it by producing corroborative evidence in support of its claim, and non-production of the parties could not be a ground for making the addition.

5. The High Court referred to the case law and emphasized that under Section 68 of the Income Tax Act, the assessee must establish the identity of the creditor/subscriber, the genuineness of the transaction, and the creditworthiness of the creditor/subscriber. The Court outlined the acceptable proofs and explanations by the assessee and the duty of the Assessing Officer to investigate the creditworthiness and genuineness of the transaction.

6. The Supreme Court dismissed the Special Leave Petition filed by the Revenue against the High Court decision, highlighting that if share application money is received from alleged bogus shareholders, the department can proceed to reopen their individual assessments.

7. It was undisputed that the share application money was received through normal banking channels via account payee cheques. The Revenue did not contest the authenticity of documents provided by the assessee, including board resolutions, bank statements, and income tax returns of the applicant companies.

8. The Assessing Officer did not verify the documents provided by the assessee or summon the directors of the applicant companies for verification. The High Court held that the identity of share applicants and the genuineness of the transactions had been established by the assessee, justifying the decisions of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal.

9. The High Court concluded that no substantial question of law arose for consideration, and the appeal was dismissed based on the reasons discussed in the judgment.