2017 (1) TMI 1621 - AT - Income Tax

Unexplained cash credits u/s 68 - assessee failed to discharge the initial burden cast upon it by furnishing identity, genuineness of the transaction and creditworthiness of the parties - addition as subscribers have not responded to summons and also failed to file necessary evidence in support of source of income to prove the capacity of the creditor - Held that - The Hon ble Supreme Court, in the case of CIT Vs. Lovely Exports Pvt. Ltd. 2008 (1) TMI 575 - SUPREME COURT OF INDIA held that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the assessing officer, then the department is free to proceed to re-open their individual assessments in accordance with law, but this amount of share application money cannot be regarded as undisclosed income u/s 68 of the assessee company. Therefore, we are of the view that once the assessee has furnished correct name and address of the subscribers to the share application money, it is for the department to re-open the assessment of individual subscribers to the share capital in accordance with law, but additions cannot be made u/s 68 of the Act as unexplained credits. In the present case, out of the total 20 subscribers to the share application money, two subscribers i.e. (1) Shri B. Maheshwar Goud and (2) Shri K. Shiva Kishore have denied investments in share application money. Shri B. Maheshwar Goud had given in writing that he had never made any investment in share application money of the company. Similarly, Shri K. Shiva Kishore also appeared before the A.O. and gave a statement that he never made any investment in the company. Therefore, we are of the view that wherever the subscribers have denied the investment in share application money, the A.O. was right in making additions towards unexplained credit u/s 68 of the Act. The CIT(A) without appreciating the facts, simply deleted additions made by the A.O. in total. Therefore, we uphold the additions made by the A.O. towards alleged bogus share application money in the case of Shri K. Shiva Kishore for the A.Y. 2006-07 and 2007-08 as unexplained cash credit u/s 68 - decided partly in favour of revenue

Summary

Issues Involved:
1. Whether the assessee proved the identity, genuineness, and creditworthiness of the share application money under Section 68 of the Income Tax Act, 1961.
2. Whether the addition of share application money as unexplained cash credits under Section 68 was justified.

Issue-wise Detailed Analysis:

1. Identity, Genuineness, and Creditworthiness of Share Application Money:

The assessee, engaged in the manufacture and sale of pesticides, filed returns for the assessment years 2006-07 and 2007-08. The Assessing Officer (A.O.) scrutinized the returns and questioned the share application money received through private placements. The A.O. issued a show cause notice demanding complete details of the subscribers, including their PAN numbers and confirmation letters. The assessee provided a list of subscribers and Xerox copies of share application forms, claiming these as confirmation letters.

Upon review, the A.O. found discrepancies in the information provided, such as incorrect addresses and PAN numbers. Further, the A.O. noted that the share application forms lacked essential details to verify the sources of money. Subsequent summons issued to 20 subscribers resulted in mixed responses: some summons were returned unserved, some subscribers appeared but failed to explain the sources of their investments, and some denied making any investments. Consequently, the A.O. concluded that the assessee failed to prove the identity, genuineness, and creditworthiness of the transactions, leading to an addition of ?86,20,000 as unexplained cash credits under Section 68.

2. Justification of Addition under Section 68:

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the share application money was received through banking channels and that the identity of the subscribers was established through PAN numbers and addresses. The CIT(A) forwarded the evidence to the A.O. for further inquiries. The A.O.'s remand report reiterated that some subscribers denied their investments, and some failed to produce proper evidence. However, the CIT(A) deleted the additions based on the ITAT Visakhapatnam bench's decision in the assessee's own case for the assessment year 2005-06.

The Revenue appealed to the ITAT, arguing that the CIT(A) failed to acknowledge that the assessee could not establish the identity, genuineness, and capacity of the subscribers. The Revenue contended that the case of CIT vs. Lovely Exports Pvt. Ltd. was distinguishable as the A.O. had conducted necessary inquiries and found discrepancies.

The ITAT examined the evidence and found that the assessee had provided details of the subscribers, including their PAN numbers and addresses. The ITAT noted that the A.O. had made additions based on the non-response of some subscribers to the summons and the lack of evidence for the sources of investments. The ITAT referred to the Supreme Court's decision in CIT vs. Lovely Exports Pvt. Ltd., which held that if the share application money is received from alleged bogus shareholders whose names are provided, the department should reopen their individual assessments rather than add the amount as undisclosed income under Section 68.

However, the ITAT distinguished the present case, noting that in some instances, subscribers denied making investments. The ITAT upheld the A.O.'s additions for subscribers who denied their investments but directed the deletion of additions where the identity of the subscribers was established.

Conclusion:

The ITAT partially allowed the Revenue's appeals, upholding the additions for subscribers who denied their investments and directing the deletion of additions where the identity of the subscribers was established. The ITAT emphasized that once the identity of the subscribers is proven, the department should proceed against the individual subscribers rather than adding the amount as unexplained cash credits under Section 68.