1992 (10) TMI 114 - AT - Income Tax

Additions To Income Assessing Officer Assessment Order Backward Area Collaboration Agreement Investment Company Setting Up Undisclosed Income

Summary

Issues Involved:
1. Justification of the addition of Rs. 17,87,500 as income from undisclosed sources.
2. Verification of the genuineness of share capital subscriptions.
3. Applicability of Section 68 of the Income-tax Act, 1961.
4. Compliance with the Companies Act, 1956.

Issue-wise Detailed Analysis:

1. Justification of the Addition of Rs. 17,87,500 as Income from Undisclosed Sources:
The primary issue in this appeal is whether the CIT(Appeals) was justified in sustaining an addition of Rs. 17,87,500 as the income of the appellant-company from undisclosed sources. The Assessing Officer (AO) initially added Rs. 53,62,500 to the appellant's income, suspecting it was introduced as advances and loans from undisclosed sources. The AO's decision was based on the inability to verify the identity and creditworthiness of the share applicants. The CIT(A) reduced this addition to Rs. 17,87,500, maintaining that 25% of the total share capital should be considered as income from undisclosed sources due to the lack of evidence proving the identity of some shareholders.

2. Verification of the Genuineness of Share Capital Subscriptions:
The appellant-company argued that it had provided all necessary materials to prove the genuineness of the share subscriptions, which were underwritten by M/s. D.B. & Co., the authorized share broker of the Calcutta Stock Exchange. The CIT(A) acknowledged that the appellant was a manufacturing company and not an investment company. Despite this, the CIT(A) upheld the addition of Rs. 17,87,500, citing the appellant's failure to produce some shareholders and prove their investment sources. The Tribunal noted that the appellant had complied with all requirements of the Company Law for raising share capital and that the share application money was received through cheques and deposited in designated banks.

3. Applicability of Section 68 of the Income-tax Act, 1961:
The Tribunal examined whether Section 68, which deals with unexplained cash credits, applied to the share capital received by the appellant. The departmental representative argued that the share application money should pass the test of Section 68. However, the Tribunal referred to the Supreme Court's decision in CIT v. Bharat Engg. & Construction Co., which held that cash credits in the initial years of a company's business could be considered capital receipts. The Tribunal concluded that Section 68 was inapplicable to the facts of this case, as the appellant was still in its formative stage and raising capital for setting up its factory.

4. Compliance with the Companies Act, 1956:
The Tribunal also considered the compliance with Section 77 of the Companies Act, 1956, which prohibits a company from buying its own shares. The Tribunal found no material evidence to support the department's assumption that the appellant violated this provision. The Tribunal emphasized that the appellant-company was a genuine manufacturing company in the process of setting up its factory and that the share capital received could not be regarded as undisclosed income.

Conclusion:
The Tribunal held that there was no justification for treating any portion of the share capital amount as the income of the appellant-company from undisclosed sources. The addition of Rs. 17,87,500 was deemed erroneous and unsustainable. Consequently, the appeal was allowed, and the addition was deleted.