2010 (5) TMI 614 - AT - Income Tax

Source of share capital - Introduction of share capital - creditworthiness of the companies and the genuineness of the transaction. - AO made the addition whereas CIT(A) deleted such additions - Held That - When companies had issued confirmation letters regarding purchase of shares from the assessee-company. They had also quote their PAN. Furthermore, these companies had also furnished memorandum of association and articles of association, certificate of incorporation issued by the Asstt. RoC and certificate issued by the Asstt. RoC regarding commencement of business. The assessee had also submitted resolution of board of directors of each company regarding investment in purchase of equity shares of M/s Hitkarni Prakashan Ltd. and copy of their bank accounts indicating availability of funds for purchase of shares. Thus, the assessee had proved the identity of the four companies, genuineness of transactions and also creditworthiness of the companies. We also find that each company is income-tax assessee and disclosed share application money in their accounts which were duly reflected in their IT returns. In our considered view, the learned CIT (A) was fully justified in deleting the addition. Recently, in the case of Lovely Exports (P) Ltd. 2008 (1) TMI 575 - SUPREME COURT OF INDIA held that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as undisclosed income of assessee company. Thus the appeal of revenue is dismissed.

Summary

Issues:
Challenge to deletion of addition under section 68 of the IT Act regarding share capital source.

Analysis:
The appeal concerned the Revenue challenging the deletion of an addition under section 68 of the IT Act related to share capital source for the assessment year 2006-07. The Revenue contended that the share capital introduction was not satisfactorily proven by the assessee. The Assessing Officer (AO) doubted the creditworthiness of the companies and the genuineness of the transaction, particularly questioning the high premium on shares. The AO taxed the amount under section 68 of the Act.

The assessee, in response, provided various documents to establish the identity of share purchasers, their creditworthiness, and the genuineness of the transactions. The assessee argued that once the burden under section 68 was discharged, the onus shifted to the AO. The assessee also cited the judgment in the case of CIT v. Lovely Exports (P) Ltd. to support their position. Additionally, the companies investing in the shares had objects related to publishing newspapers and magazines in their memorandum of association.

The assessee submitted additional documentary evidence under rule 46A of the IT Rules, which the AO objected to, stating that the funds were credited just before the transaction and that the companies' memorandum of association did not mention trading or investment in shares. However, the CIT (A) admitted the additional evidence.

The CIT (A) allowed the appeal, emphasizing that the identity, creditworthiness, and genuineness of the transaction were established. The CIT (A) reasoned that the companies had purchased shares from known sources of income, and the high premium did not invalidate the transaction. The CIT (A) highlighted that the burden was on the AO to disprove the assessee's evidence, citing relevant case law.

The Tribunal upheld the CIT (A)'s decision, noting that the companies had confirmed the share purchases, provided necessary documentation, and were income-tax assessees. Referring to the judgment in Lovely Exports (P) Ltd., the Tribunal concluded that no addition could be made in the hands of the assessee company, thereby dismissing the Revenue's appeal.