2007 (5) TMI 356 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition under Section 68 of the Income-tax Act, 1961.
2. Identity, creditworthiness, and genuineness of share applicants.
3. Legal requirements for accepting share application money in cash.
4. Standard of proof for share application money received in cash.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68 of the Income-tax Act, 1961:
The appeal revolves around the deletion of an addition of Rs. 19,15,950 made by the Assessing Officer (AO) under Section 68 of the Income-tax Act, 1961. The AO noticed that the assessee company received share application money from 18 persons but treated it as undisclosed income due to lack of evidence of the source of investment. The Commissioner of Income-tax (Appeals) [CIT(A)] deleted this addition, stating that the assessee provided all necessary details such as names, addresses, and PAN numbers of the investors, and that the AO failed to conduct independent inquiries to verify the genuineness and capacity of the investors.

2. Identity, Creditworthiness, and Genuineness of Share Applicants:
The CIT(A) held that the assessee company had furnished all relevant information regarding the shareholders, including postal addresses, income-tax assessment status, and sources of income. The CIT(A) emphasized that the AO should have conducted further inquiries if there were doubts about the genuineness or capacity of the shareholders. The CIT(A) concluded that the identity and bona fides of the shareholders were established, and the AO's addition was unjustified.

3. Legal Requirements for Accepting Share Application Money in Cash:
The CIT(A) noted that there is no legal prohibition against receiving share application money in cash. The CIT(A) referenced several judicial pronouncements supporting the view that the source of the source cannot be questioned if the identity of the shareholders is established. The CIT(A) directed the AO to delete the addition, citing various case laws that support the assessee's claim.

4. Standard of Proof for Share Application Money Received in Cash:
The Delhi High Court, in various cases, has observed that the standard of proof is more rigorous when money is received in cash. The court highlighted that in the case of private placements, the company must establish not only the identity of the share applicants but also their creditworthiness and the genuineness of the transactions. The ITAT noted that the assessee had only established the identity of the share applicants and had not provided sufficient evidence of their creditworthiness. The ITAT set aside the CIT(A)'s order and directed the AO to re-examine the matter, emphasizing the need for a more stringent standard of proof when share application money is received in cash.

Conclusion:
The ITAT allowed the revenue's appeal for statistical purposes, directing the AO to re-examine the matter and provide a reasonable opportunity for the assessee to be heard. The ITAT emphasized the need for a rigorous standard of proof when share application money is received in cash, particularly for private limited companies.