2013 (2) TMI 499 - AT - Income Tax

Addition u/s 68 Assessee received share application money from M/s. Deevee Commercial Ltd AO treated the amount received as unaccounted money Search & seizure operation conducted at Gouri Business Centre u/s. 132 and in course of such operation, statements of the six persons were recorded u/s. 132(4) From the statements of the above six persons, it was clear that Deevee Commercial Ltd. is nothing but a paper company/ jamakharchi company which is used to channelise unaccounted money by way of share application money Held that - Addition u/s. 68 of the Act can be made where an assessee fails to prove identity of the creditor; his creditworthiness and genuineness of the transaction As decided in Nemichand Kothari vs. CIT 2003 (9) TMI 62 - GAUHATI HIGH COURT where an assessee receives any money by account payee cheque from another person, then u/s. 106 of the Evidence Act the assessee can be said to have established the genuineness and creditworthiness of the payer. In CIT vs. Value Capital Services Pvt. Ltd. 2008 (4) TMI 263 - DELHI HIGH COURT it was held that there was additional burden on the department to show that even if the share-applicants did not have means to make investments, the investments made by them actually emanated from the coffers of the assessee In this case no such evidence was brought to prove that the assessee s unaccounted money routed through M/s. Deevee Commercial Ltd. or any cash was deposited in the share applicant s bank account prior to issuance of cheque for share application. Transaction was by account payee cheque. PAN details of the share applicant were provided ,therefore, the onus cast on the assessee u/s. 68 of the Act, was duly discharged when all the ingredients contained in Sec. 68 of the Act are fulfilled, there is hardly any scope to invoke that section alleging introduction of unexplained fund by way of share application As decided in CIT vs. M/s. Lovely Exports (P) Ltd 2008 (1) TMI 575 - SUPREME COURT OF INDIA no addition on account of unexplained cash credit is warranted in the case of the assessee on the given facts and circumstances. Further assessee filed a copy of Memorandum and Articles of Association of the assessee-company along with details of Demat Account - assessee purchased shares of M/s. Himadri Chemicals and M/s. Indo Tech Ltd. out of the share application money received from M/s. Deevee Commercial Ltd In past the assessee has not been indulging in share trading business AO was directed to treat the surplus as short-term capital gain instead of business income Against the revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 2.31 crores made by the Assessing Officer (A.O.) under Section 68 of the Income Tax Act.
2. Treatment of profit of Rs. 30,26,411/- from the sale of shares as short-term capital gain instead of business income.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 2.31 Crores under Section 68 of the Income Tax Act:

The department appealed against the deletion of the addition of Rs. 2.31 crores made by the A.O. under Section 68 of the Income Tax Act, alleging that the share applicants were bogus and non-existent. During the assessment proceedings, the A.O. found that the assessee received share application money of Rs. 2.31 crores from M/s. Deevee Commercial Ltd., Kolkata. The A.O. based his findings on statements recorded during a search and seizure operation under Section 132 of the Act, which suggested that M/s. Deevee Commercial Ltd. was a paper company used to channelize unaccounted money.

The assessee contested this addition before the Commissioner of Income Tax (Appeals) [C.I.T.(A)], arguing that the A.O.'s allegations were based on statements from individuals not connected to the assessee-company. The assessee provided details of the share applicant, including PAN and transaction details through account payee cheques, asserting the genuineness and creditworthiness of the share applicant.

The C.I.T.(A) called for a remand report, which reiterated the A.O.'s stance but did not address the assessee's detailed explanations. After considering all evidence, the C.I.T.(A) held that the conditions for invoking Section 68 were not satisfied, highlighting that the identity, creditworthiness, and genuineness of the transaction were established. The C.I.T.(A) relied on judicial precedents, including the Supreme Court's decision in CIT vs. Lovely Exports Pvt. Ltd., which supported the assessee's position.

Upon appeal, the Tribunal observed that the A.O. relied heavily on statements recorded under Section 132(4) without conducting independent inquiries. The Tribunal noted that the transaction was through account payee cheques and the share applicant's PAN details were provided, fulfilling the requirements under Section 68. The Tribunal upheld the C.I.T.(A)'s order, emphasizing that the department failed to provide evidence that the assessee's unaccounted money was routed through M/s. Deevee Commercial Ltd.

2. Treatment of Profit of Rs. 30,26,411/- from Sale of Shares:

The second issue involved the treatment of profit from the sale of shares of M/s. Himadri Chemicals Ltd. and M/s. Indo-Tech Transformer Ltd. The A.O. treated the profit as business income, arguing that the investments were not made from the assessee's own funds but from surplus money.

The assessee contended that it was an investment company and had consistently treated gains from share transactions as capital gains. The assessee provided evidence that the investments were made from share application money received from M/s. Deevee Commercial Ltd. and not from its own surplus funds.

The C.I.T.(A) found no merit in the A.O.'s logic, noting that the source of funds for the share purchase was clearly identified. The C.I.T.(A) observed that the assessee had not engaged in share trading in the past and had consistently treated such transactions as investments. The C.I.T.(A) directed the A.O. to treat the profit as short-term capital gain, not business income.

The Tribunal upheld the C.I.T.(A)'s order, noting that the A.O. failed to provide evidence contradicting the assessee's claims. The Tribunal emphasized that the assessee's consistent treatment of share transactions as investments warranted the classification of the profit as short-term capital gain.

Conclusion:

The Tribunal dismissed the department's appeal, upholding the C.I.T.(A)'s decisions on both issues. The addition of Rs. 2.31 crores under Section 68 was deleted, and the profit of Rs. 30,26,411/- from the sale of shares was treated as short-term capital gain.