2018 (3) TMI 1029 - AT - Income Tax

Addition towards share capital - source of the share applicants for making investment in share application monies of assessee company - Held that - The nature of receipt towards share application money is well established from the entries passed in the respective balance sheets of the companies as investments. Hence the nature of receipt is proved by the assessee beyond doubt. In respect of source of credit, the assessee has to prove the three necessary ingredients i.e identity of share applicants, genuineness of transactions and creditworthiness of share applicants. In the instant case, we find that the identity of share applicants is proved beyond doubt by the assessee by furnishing the name, address, PAN of share applicants together with the copies of balance sheets and Income Tax Returns . With regard to the creditworthiness of share applicants, the ld AO himself states that the five share applicants had invested in assessee company s shares by taking money from some other companies. Hence the source of the share applicants for making investment in share application monies of assessee company is also proved. By this, the creditworthiness of the share applicants is also proved beyond doubt. The five share applicants had paid the monies to the assessee company by account payee cheques out of sufficient bank balances available in their bank accounts, which are quite evident from the bank statements enclosed in the paper book. We agree with the arguments of the ld AR that the source of source of share applicants need not be proved by the assessee herein. The assessee had indeed proved the identity of the share applicants, creditworthiness of share applicants and genuineness of transactions beyond doubt. We find that the entire addition has been made by the ld AO based upon suspicion, surmises and conjectures and not upon proper evaluation and appraisal of the evidences and documents filed before him. - Decided against revenue

Issues Involved:
1. Justification of deletion of ?1 crore addition towards share capital by the CIT(A).
2. Verification of the identity, creditworthiness, and genuineness of share applicants.
3. Legality of assessing the source of source of share applicants' funds.

Detailed Analysis:

1. Justification of Deletion of ?1 Crore Addition Towards Share Capital by the CIT(A):
The primary issue in this appeal was whether the CIT(A) was justified in deleting the addition of ?1 crore made by the Assessing Officer (AO) towards share capital as unexplained cash credit. The assessee, a private limited company engaged in manufacturing MS Ingot and trading in steel, had increased its share capital by ?1 crore during the assessment year 2010-11. The AO added this amount as unexplained cash credit due to a lack of evidence provided during the assessment. However, the CIT(A), after remanding the matter back to the AO for verification, found that the assessee had duly submitted all necessary documents, including details of share applicants, their addresses, income tax returns, balance sheets, PAN cards, and bank statements. The AO's remand report confirmed that the share applicants provided the required information but did not respond to further inquiries regarding the source of their funds. The CIT(A) concluded that the assessee had discharged its onus under section 68 of the Income Tax Act by proving the identity, creditworthiness, and genuineness of the transactions, thus deleting the addition.

2. Verification of the Identity, Creditworthiness, and Genuineness of Share Applicants:
The assessee provided comprehensive details of the share applicants, including their IT returns, bank statements, share applications, balance sheets, PAN cards, and proof of address. The CIT(A) observed that these documents were sufficient to establish the identity, capacity, and genuineness of the investors. The AO's remand report did not find any infirmity in the documents furnished by the share applicants. The CIT(A) emphasized that the AO could obtain feedback from within the Income Tax Department if there were doubts regarding the capacity or genuineness of the investors. The CIT(A) relied on various judicial precedents, including the Supreme Court's decision in the case of Lovely Exports (P) Ltd., which held that the addition of share capital cannot be made in the hands of the recipient company if the identity and genuineness of the transactions are established.

3. Legality of Assessing the Source of Source of Share Applicants' Funds:
The AO attempted to verify the source of funds of the share applicants by issuing notices under section 133(6) of the Act to the entities from whom the share applicants claimed to have received funds. However, no replies were received from these entities. The CIT(A) and the Tribunal both held that the assessee is not required to prove the source of the source of share applicants' funds. The Tribunal noted that the identity, creditworthiness, and genuineness of the share applicants were proved beyond doubt by the assessee. The Tribunal also emphasized that the addition made by the AO was based on suspicion, surmises, and conjectures rather than proper evaluation and appraisal of the evidence. The Tribunal relied on the Supreme Court's decision in Dhakeshwari Cotton Mills Ltd. vs. CIT, which held that no addition can be made without material and on mere suspicion.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the assessee had duly discharged its onus under section 68 of the Act by proving the identity, creditworthiness, and genuineness of the share applicants. The Tribunal dismissed the revenue's appeal, affirming that the addition of ?1 crore as unexplained cash credit was unwarranted. The decision was pronounced on 07.02.2018.

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