2002 (8) TMI 804 - AT - Income Tax

Issues Involved:
1. Addition of Rs. 10 lakhs under section 68 of the Income-tax Act, 1961.
2. Verification of the genuineness of the share capital received from five shareholders.
3. Application of legal precedents including CIT v. Steller Investment Ltd. and CIT v. Sophia Finance Ltd.

Issue-wise Detailed Analysis:

1. Addition of Rs. 10 lakhs under section 68 of the Income-tax Act, 1961:
The primary issue in this case was the addition of Rs. 10 lakhs by the Assessing Officer (AO) under section 68 of the Income-tax Act, 1961. The AO treated the share capital received from five shareholders as unexplained because there was no response to the notices issued under section 133(6) to verify the genuineness of the transactions.

2. Verification of the genuineness of the share capital received from five shareholders:
The assessee contended that the share capital of Rs. 2 lakhs each was received from five identifiable parties, including four limited companies and one Hindu undivided family (HUF). The assessee provided full particulars, addresses, and income-tax file numbers of these shareholders, asserting that the identity, credit-worthiness, and genuineness of the transactions were proven. The Commissioner of Income-tax (Appeals) upheld the AO's addition, stating that the assessee failed to prove the genuineness of the transactions.

3. Application of legal precedents:
The assessee relied on the Supreme Court's decision in CIT v. Steller Investment Ltd. [2001] 251 ITR 263, arguing that no addition on account of share capital could be made in the hands of the companies and that any investigation should be done in the cases of the shareholders. However, the Commissioner of Income-tax (Appeals) distinguished this case, stating that the facts were different.

The assessee also referenced the Delhi High Court's decision in CIT v. Sophia Finance Ltd. [1994] 205 ITR 98 [FB], which held that if the identity of the shareholders was established, there was no need for further investigation into their credit-worthiness or the genuineness of the transaction. The assessee argued that all shareholders were identifiable, regularly assessed to tax, and had significant investments, thus proving their identity and credit-worthiness.

Tribunal's Findings:
The Tribunal considered the rival submissions and the law relating to the assessment of share subscriptions as income under section 68. It noted the following key points from the legal precedents:

1. CIT v. Stellar Investment Ltd. [1991] 192 ITR 287 (Delhi): Held that share capital of a limited company cannot be treated as unexplained cash credits.
2. CIT v. Sophia Finance Ltd. [1994] 205 ITR 98 (Delhi) [FB]: Held that the AO can enquire into the existence of shareholders and if they exist, no further enquiry is needed.

The Tribunal observed that the four shareholders were companies incorporated under the Companies Act with significant share capital and investments, regularly assessed to tax, and their audited accounts were on record. The HUF shareholder also had substantial capital and investments, and was regularly assessed to tax. Thus, the Tribunal concluded that the identity, credit-worthiness, and genuineness of the transactions were established.

The Tribunal also clarified that the reliance on the Supreme Court's decision in Steller Investments Ltd. [2001] 251 ITR 263 was misplaced, as it pertained to a public issue, whereas the present case involved a private limited company with known shareholders.

Conclusion:
The Tribunal held that the addition of Rs. 10 lakhs sustained by the Commissioner of Income-tax (Appeals) was not justified and deleted the same. The appeal filed by the assessee was allowed.

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