2009 (12) TMI 722 - AT - Income Tax

Unexplained cash credits - Addition made u/s 68 - amount received by way of share capital is not sustainable - genuineness of transaction and creditworthiness - Notice u/s143(2) is not addressed to the principal officer but is addressed in the name of company itself - The assessee-company is engaged in share trading in the year under consideration. AO noted that the appellant has introduced fresh share capital to the tune of Rs. 15,00,000 at a share premium of Rs. 1,35,00,000. AO held that the credit in the name of these shareholders are not genuine and represents unexplained cash credits. Accordingly he made addition of Rs. 1.50 lakhs to the returned income. HELD THAT - The facts of the present case when analysed in the light of this observation it will be seen that the instant case is not a case of public issue of shares. Rather it is a case of private placement. In a case of public issue it can be said that the appellant has discharged the onus the moment it has furnished the permanent account number of shareholders, shareholder register, share application form, share transfer register, etc. But in the case of private placement it has to satisfy the AO about the genuineness of the transaction which in the instant case is highly doubtful as some of the applicants during the course of investigation by the Investigation Wing had confessed of having provided entry only. Thus the AO has reached a dead end of the enquiry and the onus has shifted on the appellant to produce the persons for verification. We find that as per section 282(1) a notice under this Act may be served on the person therein named either by post or as if it were a summons issued by a court under the Code of Civil Procedure, 1908. The notice can also be addressed in the name of a company to the principal officer thereof. Therefore the notice can be served in the name of a company either on the company itself or on the principal officer thereof. There is no denying fact that the notice was served on the company itself. Therefore, the same is within the provision of section 282(1) of the Act and hence valid. Accordingly ground is to be dismissed. The existence of a person is not merely on paper. Particularly when the AO required the assessee to produce the share applicants and particularly when at the stated address the share applicants are not found to be existing, it cannot be said that the amount received by the assessee is proved to be towards share capital. The transaction cannot be proved merely on paper. Neither before the AO nor before the ld CIT (A) the assessee could make the share applicants available. Therefore, when the identity of the person itself is not proved, the amount received by the assessee cannot be considered to be genuinely received. the assessee-company is stated to have issued shares at premium nine times its face value. The assessee is a private limited company. It has not issued prospectus for issue of shares nor under the Companies Act, 1956, it can invite the public to apply for and allot the shares. The company is prohibited from making any invitation for allotment of shares. How the premium was fixed is not forthcoming. Looking at the balance-sheet or past history of the assessee, the assessee-company has never declared dividend in the past. The company has no business plans which can raise its profitability in the near future. The income declared by the assessee is only by way of short-term capital gain and the assessee does not seem to have carried on any business. In such circum-stances the share premium is not found to be justified by any of the act on the part of the assessee. These facts are revealing more than the apparent shown on the paper. In such circumstances the court cannot put blinker on the eye and look only at the papers presented before it. There is something more than that meets the eye. As rightly contended by the learned Departmental representative in such situation the observation in the case of CIT v. Durga Prasad More 1971 (8) TMI 17 - SUPREME COURT and in the case of Sumati Dayal v. CIT 1995 (3) TMI 3 - SUPREME COURT are apt for application. We therefore do not find any reason to hold that the share capital receipts by the assessee were from persons whose identity is established and the amount is genuinely received towards share capital. In the result the appeal is dismissed.

Summary

Issues Involved:
1. Validity of notice under section 143(2) of the Income-tax Act, 1961.
2. Addition of Rs. 1,50,00,000 under section 68 on account of share capital received.

Issue 1: Validity of Notice under Section 143(2)

The assessee contended that the notice under section 143(2) was not addressed to the "principal officer" but to the company itself. The Commissioner of Income-tax (Appeals) held that the notice addressed directly to the company was valid under section 282(1) of the Act, which allows notice to be served on the company or its principal officer. The notice was received and complied with by the appellant. The Tribunal upheld this view, dismissing the ground, stating the notice was validly served on the company itself.

Issue 2: Addition under Section 68 on Account of Share Capital Received

The assessee introduced fresh share capital of Rs. 15,00,000 with a share premium of Rs. 1,35,00,000. The Assessing Officer (AO) required the assessee to prove the identity, genuineness, and creditworthiness of the shareholders. The assessee provided confirmations, income-tax returns, and bank statements. However, summons issued to the shareholders returned unserved with remarks "no such person in the above address". The AO concluded that the credits were not genuine and added Rs. 1.50 crores as unexplained cash credits under section 68.

Before the Commissioner of Income-tax (Appeals), the assessee argued that the addition could not be made in the hands of the company if the shareholders were not genuine, citing the case of CIT v. Sophia Finance Ltd. The Commissioner distinguished this case, noting that the shareholders admitted to being entry providers, indicating the money was the appellant's own. The Commissioner upheld the addition, emphasizing the appellant's failure to establish the identity and genuineness of the shareholders, despite opportunities to produce them.

The Tribunal analyzed the facts and legal precedents. It noted that the assessee failed to prove the existence of the shareholders, as the summons returned unserved and the assessee could not produce the shareholders. The Tribunal highlighted the improbability of the appellant not knowing the whereabouts of shareholders holding more than 25% of its shares. It found the share premium unjustified, given the company's financial history and lack of business activity. The Tribunal concluded that the identity of the shareholders was not established, and the transactions were not genuine. Thus, the addition under section 68 was upheld.

Conclusion:

The Tribunal dismissed the appeal, affirming the validity of the notice under section 143(2) and upholding the addition of Rs. 1,50,00,000 under section 68, due to the failure to establish the identity and genuineness of the shareholders and the unjustified share premium.