2009 (12) TMI 33 - HC - Income Tax

Existence and genuineness of the liability failure to failed to prove the existence, genuineness and creditworthiness of these share holders held that - the aforesaid liability of the assessee cannot be said to have ceased to exist and the provision of Section 41 (1) and explanation to this provision are not applicable, because the assessee is still showing it as a liability in its books and has not written off the same. - Regarding the addition of ₹ 15,00,000/- on account of unexplained share capital, it has been held that at the time of the original assessment, the assessee had supplied the list of the persons along with their addresses to whom the shares were sold. The said list contained information, such as name, address and number of shares allotted. The AO issued enquiry letter under Section 133 (6) of the Act at random basis to 25 persons, out of whom some persons did not respond - Merely because some of the persons did not respond to the notice issued by the Assessing Officer under Section 133 (6) of the Act, it cannot be taken that the said transaction was ingenuine.

Summary

Issues:
1. Addition of liability of M/s Axis Chemicals & Pharmaceuticals.
2. Addition of unproved share capital.

Analysis:

Issue 1: Addition of liability of M/s Axis Chemicals & Pharmaceuticals
The appeal under Section 260-A of the Income Tax Act, 1961 was filed by the revenue against the order of the Income Tax Appellate Tribunal (ITAT) regarding the assessment year 1996-97. The Assessing Officer had made additions of Rs. 3,30,000 and Rs. 15,00,000 for outstanding payable to M/s Axis Chemicals and Pharmaceuticals Ltd. and unexplained share capital, respectively. The CIT (A) set aside the assessment order and upon reassessment, the additions were made again. However, the CIT (A) deleted both additions, which was upheld by the ITAT. The court analyzed the facts and held that the liability to M/s Axis Chemicals & Pharmaceuticals was genuine as the assessee provided a confirmation certificate and PAN number. The ITAT rightly concluded that the liability had not ceased to exist and the provisions of Section 41(1) were not applicable since the liability was still shown in the books and not written off.

Issue 2: Addition of unproved share capital
Regarding the addition of Rs. 15,00,000 on account of unexplained share capital, the court noted that the Assessing Officer doubted the sources of share capital as unexplained due to non-response from some individuals issued enquiry letters. However, the CIT (A) and ITAT rightly deleted this addition. The court emphasized that the genuineness of the transaction was not in question, and mere non-response to notices did not render the transaction ingenuine. Citing the case of Commissioner of Income Tax v. Lovely Exports (P) Ltd., the court clarified that if share application money is received from alleged bogus shareholders, individual assessments can be reopened, but it does not constitute unexplained income for the assessee.

In conclusion, the court found no illegality in the ITAT's order and held that no substantial questions of law arose from the revenue's appeal. The appeal was dismissed.