2012 (10) TMI 86 - AT - Income Tax

Disallowance u/s 68 - Can the amount of share money be regarded as undisclosed income u/s 68 AO made addition of unexplained share application money u/s 68 - Held that - As there is no dispute about the fact that names and addresses of the persons from whom share application money was received by the assessee company are on record, thus, the identity of the subscribers is not in dispute. Addition is to be restricted to the extent of only those applicants of shares who have denied to have made any investment in the share of the company following the decision of SC in case of Lovely Export Pvt. Ltd. (2008 (1) TMI 575). Revenue appeal partly allowed. Penalty u/s 271(1)(c) on account of unexplained share application money - Held that - As the addition on account of unexplained share application money has been confirmed by ITAT. The explanation-1 to section 271(1)(c) of the Act is attracted. Therefore AO is directed to recalculate the penalty accordingly. Appeal partly allowed.

Summary

Issues Involved:
1. Deletion of addition made under Section 68 of the Income Tax Act.
2. Confirmation of addition during the construction period.
3. Penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Deletion of Addition under Section 68 of the Income Tax Act:
The primary issue in ITA No.1542 of 2005 was the deletion of an addition of Rs.41,99,900/- made by the Assessing Officer (A.O.) under Section 68 of the Income Tax Act. The A.O. had categorized the share applicants into different groups based on their responses to the enquiry letters and summons. The A.O. found discrepancies in the identity, genuineness, and creditworthiness of the share applicants, leading to the addition of Rs.55,00,000/- as unexplained share application money. However, the CIT(A) deleted Rs.41,99,900/- of this addition, leading to the Revenue's appeal.

The Tribunal referred to the Supreme Court's decision in CIT Vs. Lovely Export Pvt. Ltd., which held that if share application money is received from alleged bogus shareholders whose names are provided to the A.O., the Department is free to reopen their individual assessments, but the share money cannot be regarded as undisclosed income of the company. The Tribunal found that the identity of the share applicants was established, and the shares were sent to them, confirming the genuineness of the transactions. Therefore, the Tribunal restricted the addition to Rs.9,00,000/- for those applicants who denied making any investment.

2. Confirmation of Addition during the Construction Period:
In ITA No.1444 of 2005, the issue was the confirmation of an addition of Rs.13,00,100/- during the company's construction period. The assessee argued that the company had not commenced any commercial operations, and hence, the addition should be deleted. The CIT(A) had confirmed the addition for shareholders in categories A, E, and F, leading to the assessee's appeal.

The Tribunal upheld the CIT(A)'s decision, confirming the addition of Rs.9,00,000/- for the share applicants who denied making any investments. The Tribunal found that the identity and genuineness of the transactions for the remaining share applicants were established, and no further addition was warranted.

3. Penalty Proceedings under Section 271(1)(c):
In ITA No.1658 of 2009, the issue was the penalty levied under Section 271(1)(c) for concealment of income. The A.O. had levied a penalty of Rs.5,14,190/- on the addition of Rs.13,00,100/-, which was confirmed by the CIT(A). The assessee argued that the penalty was not justified as the company was in its construction period and had not commenced business activities.

The Tribunal, in view of its decision in ITA Nos.1542 and 1444 of 2005, confirmed the addition of Rs.9,00,000/- and held that the penalty was leviable on this amount. The Tribunal found that the explanation offered by the assessee was false to the extent of Rs.9,00,000/-, attracting Explanation-1 to Section 271(1)(c). Therefore, the penalty for concealment was confirmed, and the A.O. was directed to recalculate the penalty accordingly.

Conclusion:
In summary, the Tribunal partly allowed the appeals of both the Revenue and the assessee. The addition under Section 68 was restricted to Rs.9,00,000/- for the share applicants who denied making any investments. The penalty under Section 271(1)(c) was confirmed for the addition of Rs.9,00,000/-. The Tribunal's decision was based on the established identity and genuineness of the remaining share applicants and the Supreme Court's ruling in CIT Vs. Lovely Export Pvt. Ltd.