2012 (10) TMI 475 - AT - Income Tax

Addition made u/s 68 on account of share application money received from non-existent companies viz O Ltd and M Ltd - Revenue contended that ultimate beneficiaries introduced cash in accounts such as M/s S and then transferred to entities like O ltd and M Ltd in the form of cheque and from there it reached to the ultimate beneficiaries in the form of share application money or unsecured loans - whole process of layering was done only to give this money laundering activity a colour of genuineness - in the absence of identity, credit worthiness and genuineness of such transactions, the share application was treated as unexplained income u/s 68 Held that - It is found that O Ltd and M Ltd are non-existent companies, therefore, their identity is even in dispute. The transaction made with the non-existent entity cannot be said to be genuine rather a circuitous method has been devised by the assessee itself to enroute its own money through these camouflage routes. Inspite of sufficient opportunities and summons issued u/s 131, the identity and credit worthiness was not established. It is not the case that no opportunity was provided to the claimed share applicant. Right from the assessment stage, first appellate stage and even before the Tribunal, no effort was made by the assessee to prove the required ingredients of section 68, therefore, order of CIT(A) in upholding addition is affirmed Decided in favor of Revenue

Issues Involved:
1. Addition on account of share application money received from Optimates Textiles Industries Limited.
2. Addition on account of share application money received from M/s Money Panny Finance Limited.
3. Onus of proof regarding the identity, creditworthiness, and genuineness of share applicants.
4. Legal precedents and applicability of section 68 of the Income Tax Act.
5. Correctness of ad-hoc disallowance out of telephone expenses.

Detailed Analysis:

1. Addition on account of share application money received from Optimates Textiles Industries Limited:
The assessee declared nil income and reflected Rs. 5 lacs as share application money from M/s Optimate Textiles Limited. The company was found involved in share trading manipulations and was delisted. Notices issued to the company were returned unserved, and investigations confirmed that the company did not exist at the given address. The Assessing Officer treated the share application of Rs. 5 lacs as unexplained income under section 68 of the Act due to the absence of identity, creditworthiness, and genuineness of the transactions. The CIT(A) affirmed this addition, and the Tribunal found that the company was fictitious, used as a device to launder money.

2. Addition on account of share application money received from M/s Money Panny Finance Limited:
Similar to the case of Optimates Textiles Industries Limited, Rs. 8 lacs received from M/s Money Panny Finance Limited was treated as unexplained income under section 68. The CIT(A) and the Tribunal upheld this addition, citing the same reasons of non-existence and fictitious nature of the company.

3. Onus of proof regarding the identity, creditworthiness, and genuineness of share applicants:
The Tribunal emphasized that the onus was on the assessee to prove the identity, creditworthiness, and genuineness of the share applicants. Despite providing documents like PAN, bank accounts, and ROC registration, the assessee failed to establish the actual existence of the companies. Notices and commissions issued to verify the addresses were returned unserved, and the companies were found non-existent. The Tribunal held that mere documentation without physical verification does not establish identity.

4. Legal precedents and applicability of section 68 of the Income Tax Act:
The Tribunal referred to various legal precedents, including the decisions in M/s Agrawal Coal Corporation, CIT v. Lovely Exports Pvt. Ltd., and others. It was noted that the decision in Lovely Exports Pvt. Ltd. applies only when the identity of the share applicants is established, which was not the case here. The Tribunal distinguished between public and private limited companies, stating that in private limited companies, the onus is stronger on the assessee to prove the identity of closely connected persons subscribing to shares.

5. Correctness of ad-hoc disallowance out of telephone expenses:
The Tribunal did not find merit in the assessee's argument against the ad-hoc disallowance of telephone expenses, as the disallowance was deemed arbitrary and unreasonable by the CIT(A).

Conclusion:
The Tribunal dismissed the appeal of the assessee, affirming the additions made by the Assessing Officer and CIT(A) on account of unexplained share application money received from non-existent companies. The onus of proving the identity, creditworthiness, and genuineness of the share applicants was not discharged by the assessee, and the legal precedents cited did not support the assessee's case. The ad-hoc disallowance of telephone expenses was also upheld.

← Previous Next →