2011 (1) TMI 194 - HC - Income Tax

Addition - Unexplained share application money - Undisclosed income - Held that in Commissioner of Income Tax Vs. Stellar Investment Ltd. 1991 -TMI - 22311 - DELHI High Court it was observed that where the increase in subscribed capital of the respondent company accepted by the ITRO and rejected by the CIT on the ground that a detailed investigation was required regarding the genuineness of subscribers to share capital as there was a device of converting black money by issuing shares with the help of formation of an investment which was reversed by the Tribunal this Court held that even if it be assumed that the subscribers to the increased share capital were not genuine under no circumstances the amount of share capital could be regarded as undisclosed income of the company. This view was confirmed by the Apex Courtin CIT Vs. Steller Investment Ltd. 2000 -TMI - 40317 - SUPREME Court . Share application money - even after considering the alleged discrepancies it does not follow that the amount of share capital was the undisclosed income of the assessee. Even the correct Bank statements as claimed by the AO reveal that the assessee has received cheques from the shareholders - no addition could be made Genuineness of the transactions identity of the share applicants creditworthiness - Held that addition was rightly deleted by the CIT (A) and the Tribunal. Requisite documents were furnished showing the existence of the shareholders from bank accounts and even their income tax details. From bank accounts of these shareholders it was found that they had deposed certain cash and source thereof was questionable. The AO should have made further probe which he failed to do. Moreover remedy with the Department lies in reopening the case of these investors and the addition cannot be made in the hands of assessee. Unexplained investment - the assessee had not given satisfactory evidence to discharge the onus. It had merely given names of the parties without anything more. That would not be sufficient compliance. Even the bank statement of the assessee which was submitted has not been proved. - assessee had not been able to discharge the onus ptomaine and addition was rightly made. Penalty u/s 271(1)(c) - Tribunal is right in holding that insofar as penalty proceedings are concerned case against the assessee of concealment of income is not made out. - penalty not to be levied.

Summary

Issues Involved:
1. Addition under Section 68 of the Income Tax Act on account of unexplained share application money.
2. Burden of proof and the nature of evidence required to discharge it.
3. Role of Assessing Officer (AO) in investigating the genuineness of transactions.
4. Treatment of share application money from alleged bogus shareholders.
5. Penalty proceedings related to the addition.

Detailed Analysis:

1. Addition under Section 68 of the Income Tax Act on account of unexplained share application money:
The primary issue in these appeals revolves around the addition made by the AO under Section 68 of the Income Tax Act due to unexplained share application money. Section 68 states that if any sum is credited in the books of an assessee and the assessee offers no satisfactory explanation about the nature and source, the sum may be charged to income tax as the income of the assessee.

2. Burden of proof and the nature of evidence required to discharge it:
The assessee must provide a satisfactory explanation regarding the nature and source of the share application money. This includes proving the identity of the shareholders, the genuineness of the transaction, and the creditworthiness of the shareholders. The court emphasized that the initial burden is on the assessee to provide these details. If the assessee provides PAN numbers, bank account details, and income tax returns of the shareholders, it shifts the burden to the AO to investigate further.

3. Role of Assessing Officer (AO) in investigating the genuineness of transactions:
The AO has the duty to investigate the genuineness of the transactions if the assessee provides preliminary evidence. The AO cannot merely rely on suspicions or general modus operandi of entry operators without specific evidence against the assessee. The AO must conduct thorough investigations and give the assessee an opportunity to cross-examine witnesses or confront the evidence against them.

4. Treatment of share application money from alleged bogus shareholders:
The court highlighted that if the share application money is received from alleged bogus shareholders, the department is free to reopen their individual assessments. However, the addition cannot be made in the hands of the assessee if the assessee has provided sufficient evidence of the shareholders' identity and creditworthiness. The court referred to several judgments, including the Supreme Court's decision in Commissioner of Income Tax Vs. Lovely Exports (P) Ltd., which supports this view.

5. Penalty proceedings related to the addition:
In ITA No.539 of 2008, the penalty proceedings against the assessee were discussed. The Tribunal deleted the penalty, noting that while the assessee failed to discharge the onus of proving the creditworthiness of the shareholders, it was not a case of concealment of income. The court upheld this view, stating that the penalty for concealment was not justified in this case.

Conclusion:
The court dismissed the appeals where the assessee had provided sufficient evidence to discharge the initial burden under Section 68. The AO's reliance on general modus operandi without specific evidence against the assessee was not sufficient to sustain the addition. The court also upheld the deletion of the penalty, emphasizing the need for concrete evidence of concealment to impose penalties.