2012 (7) TMI 624 - AT - Income Tax

Addition on account of unaccounted income - the credit entries in the books of the assessee in the form of share application as unexplained - Held that - As procedures has been prescribed for increasing the authorised capital of the company and there is nothing on record to prove that the Assessee has complied with the prescribed procedures especially with respect to the increase in authorised capital and for forfeiture of the share application money - thus the share application transaction is nothing but a design to bring in Assessee s own unaccounted income into the books without payment of taxes. As AO had issued summons u/s 131 to the Managing Director but there was no compliance - the share application money received from the investors were forfeited by the Assessee and for which nothing is on record to prove that the notice was issued to investors to indicate the intention of the Assessee to forfeit the share application money - the assessee had received premium on the share to be allotted though it was a loss making company - A.O. has rightly added the amount to its income - against assessee.

Issues:
- Appeal against order of CIT (A)- Valsad for assessment year 2007-08.
- Validity of addition of Rs. 30 lacs as unexplained income by AO.
- Discharge of onus by assessee under section 68.
- Compliance with prescribed procedures for share application money.
- Applicability of legal precedents in similar cases.
- Consideration of facts and evidence in determining tax liability.

Analysis:

1. The appeal was filed against the CIT (A)- Valsad's order for the assessment year 2007-08. The case involved the addition of Rs. 30 lacs as unexplained income by the Assessing Officer (AO). The AO observed discrepancies in the share application money received by the assessee, leading to suspicion of tax evasion.

2. The AO found that the share application money received exceeded the authorized share capital of the assessee, raising concerns about the source and legitimacy of the funds. Additionally, the AO noted the lack of compliance with procedures for share allotment and forfeiture, casting doubt on the genuineness of the transactions.

3. The assessee contended that it had fulfilled its obligations under section 68 by providing necessary documents to establish the identity and creditworthiness of the share applicants. The CIT (A) accepted the assessee's explanation and deleted the addition, prompting the revenue to appeal the decision.

4. During the appeal hearing, the Revenue argued that the AO's decision to add the amount to the total income was justified based on the findings of the assessment order. In contrast, the assessee maintained that it had met the requirements of section 68 by proving the legitimacy of the share application funds.

5. The Tribunal analyzed the facts, noting that the assessee, as a private limited company, had limitations on raising capital from the public. However, discrepancies in the share application process, including forfeiture of funds without proper documentation, raised suspicions of tax evasion through unaccounted income.

6. Citing legal precedents, the Tribunal emphasized the importance of complying with prescribed procedures for share transactions to prevent misuse of the tax system. The decision highlighted the need for thorough verification of share applicant details and financial transactions to prevent tax evasion schemes.

7. Ultimately, the Tribunal upheld the AO's decision to add the amount to the assessee's income, considering the lack of compliance with formalities, discrepancies in share transactions, and failure to provide sufficient evidence to support the legitimacy of the funds. The appeal of the assessee was dismissed based on these findings.

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