2009 (6) TMI 603 - AT - Income Tax

Search and Seizure - Addition of income The appellant raised share capital and received share application money from seven persons aggregating to Rs. 1394.15 lakhs - From the seized material AO found that these companies have been used as a conduit for investment in the assessee company - it was explained that the amounts have been received by the assessee company only through cheques and that the names and addresses of the shareholders have been furnished - Therefore, enquires were conducted not only to lift the corporate veil of the assessee company but also that of the intermediary companies which acted as conduits - Hon ble apex Court in the case of CIT vs. Lovely Exports (P) Ltd 2008 -TMI - 76942 Accordingly the appeal is allowed

Issues Involved:

1. Sustenance of addition of Rs. 13,94,15,000 under the head "Income from other sources."
2. Validity of assessing share application money as unexplained credit under Section 68 of the IT Act.
3. Burden of proof and discharge of onus by the assessee.
4. Authority of the AO to pierce the corporate veil and investigate the genuineness of transactions.
5. Admissibility of evidence and principles of natural justice.
6. Applicability of precedents and judgments in similar cases.

Issue-wise Detailed Analysis:

1. Sustenance of addition of Rs. 13,94,15,000 under the head "Income from other sources":

The primary contention of the assessee was that the addition of Rs. 13,94,15,000 as "Income from other sources" was made without appreciating that the burden of proof had been discharged. The AO initiated proceedings under Section 153A following a search and seizure operation. The AO found that the share application money exceeded the authorized share capital and suspected the genuineness of the transactions. The AO concluded that the funds were routed through intermediary entities, which acted as conduits for the investment in the assessee company.

2. Validity of assessing share application money as unexplained credit under Section 68 of the IT Act:

The AO investigated the sources of the share application money and found discrepancies in the financial transactions and the creditworthiness of the intermediary entities. The AO treated the share application money as unexplained credit under Section 68, citing that the intermediary companies had no business operations and their directors were ignorant of the financial transactions. The learned CIT(A) upheld the AO's decision, agreeing that the intermediary companies acted as conduits for channeling funds to the assessee.

3. Burden of proof and discharge of onus by the assessee:

The assessee argued that the burden of proof was discharged by providing the names, addresses, and income-tax particulars of the share applicants. The assessee cited the Supreme Court's decision in CIT vs. Steller Investment Ltd., arguing that the share application money could not be regarded as undisclosed income. However, the AO and learned CIT(A) found that the assessee failed to prove the creditworthiness of the share applicants and the genuineness of the transactions.

4. Authority of the AO to pierce the corporate veil and investigate the genuineness of transactions:

The AO, citing various judgments, argued that he had the authority to pierce the corporate veil and investigate the true nature of the transactions. The AO referred to the judgments in CIT vs. Sophia Finance Ltd. and Juggilal Kamlapat vs. CIT, which allowed the IT authorities to look beyond the corporate entity to ascertain the reality of the transactions. The AO's investigation revealed that the intermediary companies were paper entities created to facilitate the transfer of funds.

5. Admissibility of evidence and principles of natural justice:

The assessee contended that the AO violated the principles of natural justice by not providing an opportunity to cross-examine the persons whose statements were used against the assessee. The assessee argued that the AO relied on statements obtained behind the assessee's back and did not allow the assessee to rebut the evidence. The learned CIT(A) called for a remand report and considered the arguments but upheld the AO's decision, finding that the share applicants lacked creditworthiness.

6. Applicability of precedents and judgments in similar cases:

The assessee relied on the Supreme Court's decision in CIT vs. Lovely Exports (P) Ltd., arguing that if the share application money is received from alleged bogus shareholders, the Department should proceed to reopen their individual assessments. The Tribunal found that the order in CIT vs. Lovely Exports (P) Ltd. was a speaking order and binding as a law declared by the Supreme Court under Article 141 of the Constitution. The Tribunal concluded that the AO failed to bring positive evidence to indicate that the share application money represented the assessee's undisclosed income.

Conclusion:

The Tribunal allowed the appeal, finding that the assessee had discharged the onus of proving the identity of the shareholders and the genuineness of the transactions. The Tribunal held that the AO's suspicion alone was not sufficient to treat the share application money as unexplained credit under Section 68. The Tribunal emphasized that the Revenue could reopen the individual assessments of the shareholders if their creditworthiness was in doubt.

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