2014 (2) TMI 751 - HC - Income Tax

Income from undisclosed sources u/s 68 of the Act Share application money Held that - In the remand report, the Commissioner (Appeals) had been informed that the bank statements sought for were given in respect of a limited period - the bank statements of the three companies for the same period were sought -These established a clear pattern - The accounts did not disclose large volume of transactions - All these cash deposits were made into accounts the same day or on proximate days, and the pay orders given to apply to the shares were issued from a far-off bank branch in NOIDA - These, together with the share applicants lack of resources and the woefully inadequate share capital, as well as the authorized and subscribed share capital of the assessee showed that the transaction claimed to have resulted in receipt of share money was dubious. The decision in CIT v. Lovely Exports Pvt. Ltd. 2008 (1) TMI 575 - SUPREME COURT OF INDIA followed - the assessee is under an obligation to dispel any doubts regarding the genuineness of an investor and the genuineness of the transaction - though the assessee furnished particulars relating to three share applicants, the further inquiry made by the AO raised more questions than answers - The share applicants lack of resources, the assessee s position vis- -vis share amounts received and its commercial condition all pointed to the amount received by it falling within the mischief of Section 68 as unexplained amounts - Decided against Assessee.

Issues Involved:
1. Whether the Tribunal erred in setting aside the order of the CIT (A) that accepted the assessee's contention about the genuineness of the share application money received.
2. Whether the share application money of Rs. 80 lakhs received by the assessee could be included under Section 68 of the Income Tax Act as unexplained income.

Issue-Wise Detailed Analysis:

1. Tribunal's Error in Setting Aside the Order of CIT (A):
The assessee appealed against the ITAT's decision, which overturned the CIT (A)'s acceptance of the assessee's explanation regarding the share application money. The CIT (A) had relied on the Supreme Court's decision in CIT v. Lovely Exports Pvt. Ltd., which asserts that if the identity of the share applicants is established, no addition can be made in the hands of the assessee. The CIT (A) had found that the AO did not doubt the identity of the shareholders and had not pointed out any discrepancies in the income-tax particulars provided. However, the Tribunal found that the AO had conducted a thorough inquiry, revealing inconsistencies in the bank account details and the timing of the pay orders, leading to the conclusion that the transactions were not genuine.

2. Inclusion of Share Application Money Under Section 68:
The AO had asked the assessee to furnish details regarding the genuineness of the transactions, identity, and creditworthiness of the share applicants. The assessee provided various documents, but the AO found discrepancies in the bank account details of the share applicants. Summons issued to the applicants returned unserved, and the AO noted that the pay orders were issued from accounts that were either non-existent at the time or had cash deposits immediately before the issuance of pay orders, raising doubts about the genuineness of the transactions. The AO concluded that the assessee failed to prove the identity and creditworthiness of the creditors and the genuineness of the transactions, leading to the addition of Rs. 80 lakhs under Section 68.

Tribunal's Findings:
The Tribunal upheld the AO's findings, noting that the pay orders were issued in a suspicious manner, with all three share applicants obtaining pay orders from the same bank on the same day, despite being located in different parts of Delhi. The Tribunal found that the assessee's failure to produce the directors of the share applicants or provide their latest addresses further supported the conclusion that the transactions were not genuine.

Assessee's Contention:
The assessee argued that the AO and the Tribunal had drawn incorrect inferences and that the AO was influenced by incomplete bank account details. The assessee cited the Supreme Court's decision in Lovely Exports Pvt. Ltd., stating that the responsibility was only to provide acceptable evidence about the identity of the share applicants and the genuineness of the transaction, not to produce the applicants. The assessee also highlighted that the AO accepted the share application money of Rs. 1 crore, implying that the transactions were genuine.

Court's Decision:
The Court found that the assessee failed to dispel doubts regarding the genuineness of the share applicants and the transactions. The further inquiry by the AO raised more questions, and the share applicants' lack of resources, along with the assessee's financial condition, pointed to the amount received as unexplained under Section 68. The Court affirmed the Tribunal's view and dismissed the appeal, concluding that the amount received was rightly treated as bogus share capital.

Conclusion:
The Court dismissed the appeal, affirming the Tribunal's decision that the share application money of Rs. 80 lakhs received by the assessee was unexplained and fell within the mischief of Section 68 of the Income Tax Act. The Court held that the assessee failed to prove the genuineness of the transactions and the creditworthiness of the share applicants, upholding the addition made by the AO.

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