2011 (7) TMI 235 - HC - Income Tax

Penalty - Deduction u/s 36(1)(iii) - Undisclosed income - assessee had received Rs. 42,78,756 as share application money through private persons - assessee was unable to establish the identity, creditworthiness and the genuineness of the transaction so as to escape from the provisions of section 68 of the Act - primary onus lies upon the assessee to establish that the assessee is not liable for addition under section 68 of the Act as the amount in fact belongs to the persons who had applied and submitted share application money - Decided against the assessee Regarding Deduction u/s 36(1)(iii) - assessee had paid the amount of interest relating to expansion of its business prior to the utilization of the machinery, the Tribunal had categorically held that the assessee had borrowed the loans which were utilized for making the advances for acquisition of new asset - Decided against the assessee

Issues Involved:
1. Treatment of share capital subscription by alleged bogus shareholders as undisclosed income.
2. Ignoring the law laid down by the Supreme Court in CIT v. Steller Investment Ltd.
3. Error in interpreting the decision of the Supreme Court in Lovely Exports.
4. Application of the proviso to section 36(1)(iii) of the Income-tax Act.
5. Legal sustainability of the impugned orders passed by the authorities.

Issue-wise Detailed Analysis:

1. Treatment of Share Capital Subscription as Undisclosed Income:
The primary issue was whether the subscription of share capital by alleged bogus shareholders could be treated as undisclosed income of the assessee. The Tribunal upheld the addition made by the Assessing Officer (AO) under section 68 of the Income-tax Act, 1961. The AO found that the assessee failed to discharge the primary onus to establish the identity, creditworthiness, and genuineness of the transactions. The share application money amounting to Rs. 42,78,756 was received in cash from individuals whose identities were not satisfactorily verified. The Tribunal noted that the names provided had incomplete addresses, lacked PAN numbers, and some forms only had thumb impressions. The Tribunal relied on the precedent set in CIT v. Lovely Exports (P.) Ltd., where it was held that if the share application money is received from alleged bogus shareholders whose names are given, the department is free to proceed against them individually. However, in this case, the assessee failed to establish the identity of the subscribers, thus justifying the addition under section 68.

2. Ignoring the Law Laid Down in CIT v. Steller Investment Ltd.:
The assessee contended that the authorities ignored the Supreme Court's ruling in CIT v. Steller Investment Ltd., which dealt with the treatment of share application money. However, the Tribunal found that the assessee did not discharge the onus of proving the identity and creditworthiness of the subscribers, thus distinguishing the present case from Steller Investment Ltd. The Tribunal emphasized that the primary onus lies on the assessee to establish that the share application money does not represent undisclosed income.

3. Error in Interpreting Lovely Exports Decision:
The assessee argued that the authorities misinterpreted the Supreme Court's decision in Lovely Exports. The Tribunal clarified that the ruling in Lovely Exports was applicable only when the identity of the shareholders is established. In this case, the assessee failed to provide complete and credible information about the shareholders, leading to the conclusion that the share application money was undisclosed income.

4. Application of Proviso to Section 36(1)(iii):
The second major issue was the disallowance of interest under the proviso to section 36(1)(iii) of the Act. The AO disallowed Rs. 6 lakhs of interest related to advances made for acquiring new assets, which were not yet put to use. The Tribunal upheld this disallowance, noting that the interest attributable to capital borrowed for acquiring new assets for business expansion cannot be deducted until the asset is put to use. The Tribunal's findings were based on the fact that the assessee borrowed loans specifically for acquiring new assets, which were not immediately utilized, thus invoking the proviso to section 36(1)(iii).

5. Legal Sustainability of the Impugned Orders:
The assessee challenged the legal sustainability of the orders passed by the authorities. The Tribunal and the High Court found no merit in the assessee's arguments. The High Court concluded that the assessee failed to establish the identity, creditworthiness, and genuineness of the transactions related to the share application money. Additionally, the disallowance of interest under section 36(1)(iii) was found to be justified as per the proviso. Consequently, the High Court dismissed the appeal, affirming the Tribunal's order and holding that no substantial question of law arose in the case.

In conclusion, the High Court upheld the Tribunal's findings on both the treatment of share application money as undisclosed income and the disallowance of interest under section 36(1)(iii), dismissing the assessee's appeal.

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