2009 (11) TMI 335 - HC - Income Tax

Cash Credits- Share capital- The assessee company was incorporated as a public company for which purpose share capital was invited from the public all over India. On account of chance in law under which the limit for public limited company was raised the assessee could not achieve the target of share capital. The assessee suffered loss because the whole investment went waste and the activities of the assessee came to a standstill. The Assessing Officer passed ex parte orders making addition of the sum received as share capital because the orders making addition of the sum received as share capital because the assessee was not able to file confirmations since there were no activities in the company and the person not co-operating. The Tribunal dismissed the appeal of the assessee and partly allowed the appeal filed by the Revenue thereby reducing the amount of relief granted by the commissioner (Appeals) held that- the company was dead and defunct from 1999 and since then its directors had been doing odd job and from 2002 they were in private service with other companies. However this company never declared any dividend because of losses. Therefore the addition made by the Assessing Officer was to be deleted.

Summary

Issues:
- Whether the Income-tax Appellate Tribunal was correct in confirming the additions in respect of share capital amount and sundry creditors treating it as undisclosed income under section 68 of the Income-tax Act, 1961?

Analysis:
1. Background and Facts: The case involved an appeal regarding the addition of share capital amount and sundry creditors as undisclosed income under section 68 of the Income-tax Act, 1961. The appellant-company was unable to achieve the target of share capital due to changes in the law, leading to losses and non-functionality.

2. Assessment by Authorities: The Assessing Officer initially made additions of Rs. 33,71,197 due to non-cooperation of parties in providing confirmations. The Commissioner of Income-tax (Appeals) set aside the assessment considering the appellant's inability to file confirmations. However, the Assessing Officer again made additions on account of unexplained share capital in a subsequent assessment.

3. Proceedings before Tribunal: The Commissioner of Income-tax (Appeals granted partial relief, and both the assessee and the Revenue appealed to the Income-tax Appellate Tribunal. The Tribunal partly allowed the Revenue's appeal, reducing the relief granted. Subsequently, the assessee appealed against the Tribunal's decision.

4. Critical Aspects Considered: The High Court noted significant aspects overlooked by the Tribunal. The appellant demonstrated that share capital was received from numerous shareholders through banking channels and stock brokers. Due to the company's non-functionality and losses, it was challenging to obtain confirmations from shareholders, many of whom had invested small amounts.

5. Confirmation by Shareholders: While some shareholders confirmed their investments, others did not respond or could not be contacted. Notably, no party denied contributing share capital. Additionally, detailed information and confirmations were provided for members who contributed Rs. 14,76,000.

6. Totality of Circumstances: Considering the circumstances, including the company's closure, directors' change in employment, and lack of dividends due to losses, the Court concluded that the investments were not unaccounted for. The Court accepted the appellant's affidavit stating the company's defunct status since 1999.

7. Judgment: The High Court favored the assessee, ruling in their favor by deleting the addition made by the Assessing Officer on the grounds of share capital and sundry creditors. The appeal was allowed based on the totality of circumstances and the lack of undisclosed income in the investments made by shareholders.