2006 (8) TMI 117 - HC - Income Tax

Assessee had received an amount of ₹ 15 lakhs towards share capital contribution from one of its Directors AO added the share capital money as unexplained cash credit u/s 68 Once genuineness and creditworthiness of creditor is established then Revenue can t go further to find out genuineness and creditworthiness of the person from whom that creditor received cheques deletion of the addition was justified

Summary

Issues:
1. Dispute over the genuineness of share capital contribution and source of investment.
2. Application of Section 68 of the Income Tax Act, 1961.
3. Assessment of creditworthiness of parties involved in the transaction.

Analysis:
1. The case revolved around the dispute regarding the genuineness of a share capital contribution of Rs. 15 lakhs received by the assessee from one of its Directors, Smt. Kavita Kothari. The Assessing Officer raised concerns about the source of investment, leading to an investigation into the transactions involving M/s Mahal Chand Moti Lal Kothari. The Tribunal noted that Smt. Kavita Kothari's creditworthiness was established, as evidenced by her bank statements and income tax return filings, thereby rejecting the Assessing Officer's addition of the amount as unexplained cash credit under Section 68 of the Act.

2. The application of Section 68 of the Income Tax Act was a crucial aspect of the case. The Revenue contended that they could question the genuineness of M/s Mahal Chand Moti Lal Kothari to invoke Section 68. However, the Tribunal disagreed, emphasizing that once the creditworthiness of Smt. Kavita Kothari was established, there was no need to further investigate the genuineness of M/s Mahal Chand Moti Lal Kothari. The judgment highlighted the importance of substantiating the nature and source of credits in the books of account to determine tax liability under Section 68.

3. The assessment of creditworthiness of the parties involved played a significant role in the decision. The Tribunal found that both Smt. Kavita Kothari and M/s Mahal Chand Moti Lal Kothari had the necessary creditworthiness to support the transactions in question. The judgment referenced previous court decisions, such as Commissioner of Income Tax vs. Stellar Investment Ltd., to establish the criteria for invoking Section 68 and determining the legitimacy of share capital contributions. Ultimately, the Tribunal dismissed the Revenue's appeal, affirming the genuineness of the transactions and the creditworthiness of the parties involved.

In conclusion, the judgment upheld the genuineness of the share capital contribution based on the established creditworthiness of the parties involved, rejecting the Revenue's attempt to invoke Section 68 to question the credibility of M/s Mahal Chand Moti Lal Kothari. The decision emphasized the importance of substantiating transactions and creditworthiness to determine tax liability under the Income Tax Act.