2005 (3) TMI 397 - AT - Income Tax

Cash Credits - addition u/s. 68 - share application money - Onus to establish the identity of the creditors - genuineness and creditworthiness of the transaction - HELD THAT - The share application form and letter of allotment of shares are available on record. Thus, identity of these investments companies and their existence cannot be doubted. The Hon'ble Delhi High Court in the case of Steller Investment 1991 (4) TMI 100 - DELHI HIGH COURT had held that the share capital of a limited company cannot be brought to tax as unexplained cash credit on the same footing as a spurious loan can possibly be assessed. The fact that some of the investor companies got the pay order made from the account of M/s M.G. Investments but the same has not been reflected as loan in their respective balance sheet, is matter for enquiry in the hands of the said investor companies and not in the case of the assessee-company. Hence, similarly, the discrepancies found in the account of some of investor companies is a cause to make enquiry in their cases. Further, the fact that all the share applications were received by the assessee before the commencement of the business, has not been disputed by the Revenue. In Bharat Engineering Construction Co. 1971 (9) TMI 14 - SUPREME COURT , the assessee was an engineering construction company, which commenced its business in May, 1943 but there were several cash credit entries in the first year of its business amounting to Rs. 2.5 lakhs The assessee was called upon to explain such credit entries. The explanation of the assessee did not find favour with the AO, the CIT(A) nor the Tribunal. However, the Tribunal deleted the addition by taking the plea that such cash credit entries could not represent the income or profit of the assessee as they were all made very soon after the company commenced its activities. In this manner, the Tribunal took the view that in the very nature of things the assessee could not have earned such huge amount of profit very soon after it commenced its activities. The apex Court, in the above background inferred that it was reasonable to assume that such credit entries were capital receipts although for one reason or another, the assessee had not come out with the true story as regards the persons from whom such amounts were received. The apex Court approved the finding of the Tribunal. Thus, we see no reason to interfere with the impugned order. Hence, the same is upheld. In the result, the appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition under Section 68 on account of share application money.
2. Proof of identity, creditworthiness, and genuineness of transactions.
3. Burden of proof and onus on the assessee.
4. Legal precedents and their applicability.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68 on Account of Share Application Money:
The Revenue challenged the CIT(A)'s order which deleted the addition of Rs. 53 lakhs made under Section 68 of the IT Act. The AO had added this amount to the assessee's income, arguing the share application money was unexplained. The CIT(A) deleted this addition, holding that the assessee had provided sufficient evidence to prove the identity and existence of the share applicants.

2. Proof of Identity, Creditworthiness, and Genuineness of Transactions:
The AO issued letters under Section 133(6) to the share applicants, which were returned undelivered. The inspector's report indicated that the companies did not exist at the given addresses. The AO also noted discrepancies in the balance sheets of the investor companies and observed that the pay orders were made from accounts with significant cash deposits just before the investments. The assessee argued that it had provided all necessary documents, including balance sheets, IT returns, and confirmations from the investor companies. The CIT(A) agreed with the assessee, noting that the identity and existence of the investor companies were established through the provided documents.

3. Burden of Proof and Onus on the Assessee:
The AO argued that the onus was on the assessee to prove the identity, creditworthiness, and genuineness of the transactions. The assessee contended that it had discharged its burden by providing detailed information about the investors. The CIT(A) held that the assessee had fulfilled its obligation by providing substantial evidence, and any further enquiry should be conducted by the Department.

4. Legal Precedents and Their Applicability:
The AO relied on the Calcutta High Court's decisions in Hindusthan Tea Trading Co. Ltd., Ruby Traders & Exporters Ltd., and Nivedan Vanijya Niyojan Ltd., arguing that the principles in CIT vs. Steller Investment Ltd. were no longer good law. The CIT(A) and the Tribunal, however, relied on the Delhi High Court's decision in CIT vs. Steller Investment Ltd., which held that even if the subscribers to the share capital were not genuine, the amount could not be regarded as undisclosed income of the company. The Tribunal also referenced the Supreme Court's dismissal of the SLP against the Steller Investment decision, reinforcing its binding nature.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the assessee had provided sufficient evidence to establish the identity and existence of the investor companies. The discrepancies noted by the AO were deemed insufficient to classify the share application money as unexplained income. The Tribunal emphasized that the Department could conduct further enquiries into the investor companies if necessary. The appeal of the Revenue was dismissed.