2013 (2) TMI 665 - AT - Income Tax

Addition u/s 68 - unexplained share application money - CIT(A) deleted the addition - Held that - In the present case the assessee furnished satisfactory explanation that money has been contributed by various persons viz. Sri P. Muddukrishna Reddy Sri C. Hanumantha Reddy etc. and filed respective confirmation letters in the case of M/s. AMR Hospitality Services Ltd. The Assessing Officer also recorded statement from Sri Muddukrishna Reddy and Sri C. Hanumantha Reddy. The same has been routed through banking channels. Similarly in the case of Sangam Sugar Ventures Ltd. Smt. B. Sugunamma Sri C. Hanumantha Reddy and Sri Damodar Reddy have filed their confirmation letters. Sworn statement was also recorded from Sri C. Hanumantha Reddy. They are Income-tax assessees. In spite of this the Assessing Officer doubted the genuineness of the transactions. The contention of the Assessing Officer is that these persons are name lenders and were used as a ploy by the director of the assessee-company to route the unaccounted money of the flagship company to the director by bringing the money in their names. It is also recorded by the Assessing Officer that these name lenders having filed their returns of income only to explain the investment so as to facilitate the conversion of unaccounted money into the assessee s company. It was also alleged that the money was routed like this as a device to explain the investments. However the fact is that these persons who have made investments in the assessee-company are Income-tax assessees and have given the confirmation letters. Had the Assessing Officer has any doubt it should be questioned in the hands of the investors. A similar issue was considered by the jurisdictional High Court in the case of CIT v. Lanco Industries Ltd. 1999 (12) TMI 45 - ANDHRA PRADESH High Court . While rejecting the Revenue s appeal the High Court observed that merely by reason of unsatisfactory explanation relating to the source of investment by the shareholders the money invested in shares cannot be treated as income of the assessee. If the ostensible shareholders failed to explain the means of investment that should have been treated as unexplained income in their hands. In order to add it to the income of the assessee there must be a further finding that in fact the shareholders were name lenders and the money allegedly invested by them really belongs to the directors of the assessee-company. In the present case the Department having accepted the returns of income filed by the ostensible shareholders it cannot go back while making the assessment of the assessee to hold that those shareholders are money lenders and investments were unexplained. Had the Department disregarded the returns filed by the alleged shareholders alleging that the money moved out of the assessee s hands to the hands of the alleged shareholders only then it can be treated as the money belonging to the assessee. Without bringing on record a finding to show that the money has moved from the assessee s hands to the alleged shareholders hands and having accepted the alleged shareholders it is not possible to us to sustain the addition in the hands of the assessee. Further on the basis of evidence available on record it is not possible to hold that the transactions are stage managed and the share application money was received from bogus shareholders without bringing on record the money has moved from the assessee s hands to the shareholders. As held by the Supreme Court in the case of CIT v. Lovely Exports P. Ltd. 2008 (1) TMI 575 - SUPREME COURT OF INDIA that if the share application money is received by the assessee-company from the alleged bogus shareholders whose names are given to the Assessing Officer then the Department is free to proceed to reopen their individual assessments in accordance with law but it cannot be regarded as unexplained income of the assessee-company. In the present case considering the facts of the case as the Department failed to show that the share application money actually emanated from the coffers of the assessee-company addition was rightly deleted by the Commissioner of Income-tax (Appeals) and the action of the Commissioner of Income-tax (Appeals) is confirmed. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made under section 68 of the Income-tax Act, 1961.
2. Creditworthiness of creditors.
3. Identity and genuineness of transactions.
4. Assessing Officer's conclusions and observations.
5. Legal precedents and their applicability.

Issue 1: Deletion of Addition Made Under Section 68 of the Income-tax Act, 1961

The Revenue appealed against the deletion of additions made under section 68 of the Income-tax Act, 1961, involving Rs. 4.7 crores for M/s. AMR Hospital Services Ltd. and Rs. 2.22 crores for M/s. AMR Sangam Sugar Ventures Ltd. The Assessing Officer had treated these amounts as unexplained credits, questioning the creditworthiness of the creditors and the genuineness of the transactions.

Issue 2: Creditworthiness of Creditors

The Assessing Officer doubted the creditworthiness of the creditors, particularly Sri C. Hanumantha Reddy, Sri P. Muddukrishna Reddy, and Sri Damodar Reddy. The officer noted that these individuals were either employees or relatives of the AMR group and acted as conduits to route unaccounted money. The creditors' bank accounts mainly showed credits from M/s. AMR Constructions Ltd., which were quickly withdrawn and paid to the AMR group's directors or their family members. The Assessing Officer concluded that the creditors lacked the financial capacity to make such large investments.

Issue 3: Identity and Genuineness of Transactions

The Commissioner of Income-tax (Appeals) found no dispute regarding the identity of the creditors since confirmations and other relevant information were provided. The transactions were conducted through bank channels and were supported by income tax returns. The main issue was the creditworthiness of the creditors, which the Assessing Officer questioned based on his interpretation of the facts and findings from search proceedings.

Issue 4: Assessing Officer's Conclusions and Observations

The Assessing Officer treated the credits as unexplained based on several observations:
- The creditors were employees or relatives of the AMR group.
- The sub-contracts were not backed by written agreements.
- The creditors' bank accounts showed credits from M/s. AMR Constructions Ltd., which were quickly withdrawn and paid to the AMR group's directors or their family members.
- The creditors lacked the financial capacity to make such large investments.

Issue 5: Legal Precedents and Their Applicability

The Commissioner of Income-tax (Appeals) referred to several legal precedents to support the deletion of the additions:
- CIT v. Illac Investment P. Ltd. [2006] 287 ITR 135 (Delhi): If the assessee identifies the subscriber and provides evidence of their creditworthiness, the cash credits cannot be treated as the company's income.
- CIT v. Value Capital Services P. Ltd. [2008] 307 ITR 334 (Delhi): Share application money cannot be assessed in the company's hands unless the Department shows that the money emanated from the company's coffers.
- CIT v. Gujarat Heavy Chemicals Ltd. [2002] 256 ITR 795 (SC): The correct course is to assess the real owner of the money, not the company.
- CIT v. Lovely Exports P. Ltd. [2008] 299 ITR 268 (Delhi): If share application money is received from alleged bogus shareholders, the Department can reopen their individual assessments, but it cannot be treated as the company's income.

Conclusion

The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to delete the additions. The Tribunal noted that the assessee had provided satisfactory explanations and confirmation letters from the creditors, who were also income tax assessees. The Tribunal agreed that the Assessing Officer should have questioned the creditworthiness in the hands of the investors, not the assessee-company. The Tribunal dismissed the Revenue's appeals, confirming that the share application money could not be regarded as unexplained income of the assessee-company.