2010 (11) TMI 1084 - AT - Income Tax

Summary

Issues Involved:
1. Whether the transaction was a scheme for laundering black money into white money.
2. Whether the Assessing Officer (A.O.) was entitled to pierce the corporate veil.
3. Whether the share capital of Rs. 69.30 lakhs received from investors was liable to be treated u/s 68 as unexplained credits.

Summary:

Issue 1: Scheme for Laundering Black Money
The department contended that the transaction was a scheme for laundering black money into white money. The A.O. observed that the assessee-company raised fresh capital of Rs. 69.30 lakhs by issuing fully paid-up shares. The A.O. noted that the three companies purchasing the shares had their registered offices at the same address and were involved in unusual banking transactions. The A.O. concluded that the sum of Rs. 69.30 lakhs was the assessee's own money systematically arranged to form its capital in disguise.

Issue 2: Piercing the Corporate Veil
The A.O. argued that the assessee-company was the final recipient of the share application money and had not clarified the use of the capital obtained. The A.O. treated the fund of Rs. 69.30 lakhs as the assessee-company's own money and added it back to its total income. The department urged for the restoration of the assessment order, asserting that the A.O. was entitled to pierce the corporate veil.

Issue 3: Unexplained Credits u/s 68
The assessee appealed before the ld. C.I.T.(A), who held that the share capital of Rs. 69.30 lakhs received from investors was not liable to be treated u/s 68 as unexplained credits. The ld. C.I.T.(A) observed that the assessee had furnished all necessary details, including the identity, creditworthiness of contributors, and genuineness of transactions. The A.O. failed to establish a link between the unaccounted income of the assessee and the share capital contributors. The ld. C.I.T.(A) relied on judicial decisions, including the Supreme Court case of M/s. Lovely Exports Pvt. Ltd., which held that if the share application money is received from alleged bogus shareholders, the department could proceed to open their individual assessments but could not regard it as undisclosed income of the assessee-company.

Conclusion:
The Tribunal upheld the order of the ld. C.I.T.(A), concluding that the assessee had proved the identity, creditworthiness of share applicants, and genuineness of the transactions. The Tribunal found no merit in the department's appeal and dismissed it, affirming that the share capital of Rs. 69.30 lakhs was not liable to be treated u/s 68 as unexplained credits. The decision was pronounced in the open Court on 19.11.2010.