2016 (6) TMI 1390 - HC - Income Tax

Addition u/s 68 - unexplained share capital - HELD THAT - Supreme Court has in the case of Commissioner of Income tax v. Lovely Exports (P) Ltd. 2008 (1) TMI 575 - SC ORDER 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 reopen the individual assessments in accordance with law. Such amounts cannot be regarded as undisclosed income u/s 68 of the assessee company. Applying the said principles to the facts of the present case the Assessing Officer having traced out the source of funds to specific persons who had invested the same in share of the assessee company it was open for the Assessing Officer to proceed against the said persons. The funds not having emanated from the assessee company there was no warrant for making addition of the said amount as undisclosed income under section 68 of the act in its hands. In the circumstances the tribunal was justified in deleting the addition made under section 68 - Decided in favour of the assessee

Summary

Issues:
Challenge to the judgment of the Income Tax Appellate Tribunal regarding share application money source explanation.

Analysis:
1. The appellant challenged the Tribunal's order regarding the addition of ?5,00,000 as unexplained income under section 68 of the Income Tax Act. The Tribunal set aside the CIT (A)'s decision in favor of the appellant. The appellant received the amount from a shareholder towards share application money, which the Assessing Officer deemed unexplained. The appellant's case was that the Tribunal incorrectly treated the matter as a cash credit under section 68 and held that the onus was not discharged. The Tribunal directed the Assessing Officer to investigate the matter further. The shareholder confirmed the payment through a cheque and explained the source as her deceased husband's business funds.

2. The appellant's counsel relied on the Supreme Court's decision in Commissioner of Income Tax v. Lovely Exports (P) Ltd., emphasizing that if share application money is received from alleged bogus shareholders, the Department can reopen individual assessments. The counsel argued that this principle was consistently followed by the Court in various cases. The respondent's counsel contended that no interference was warranted based on the findings of the CIT (A) and the Tribunal. The Court examined the records and reiterated the applicability of the Lovely Exports case in multiple decisions, highlighting that funds traced to specific investors should not be treated as undisclosed income under section 68.

3. Citing previous judgments like Hindustan Inks & Resins Ltd. and others, the Court emphasized the importance of tracing funds to genuine investors rather than treating them as undisclosed income. Referring to the decision in Asstt. CIT v. Tarujyot Investment Ltd., the Court reiterated that if the source of funds can be traced to specific persons, the Department can proceed against those individuals, and the company should not be penalized for undisclosed income under section 68. Based on these principles and the facts of the case, the Court ruled in favor of the appellant, holding that the addition of ?5,00,000 as undisclosed income was not justified under section 68.

This detailed analysis showcases how the Court interpreted the law, applied relevant precedents, and ultimately ruled in favor of the appellant regarding the treatment of share application money in the case.