2005 (8) TMI 67 - HC - Income Tax

Assessing Officer reached his conclusion that there has been increase in the share capital of the assessee-company on account of issue of shares. The shares have been issued to limited companies as well as individuals on the basis of receipt of share applications through banking channels - Existence of Umesh Kumar has been established as shareholding is issued in his name. No effort was made to find out the real investor as to who has made investment in the name of Umesh Kumar. Hence additions of increase in share capital on account of share application of Umesh Kumar also could not have been sustained. Appeal is allowed. The additions made on account of increase in the share capital of the company on account of investment by Westbury Invest Trade P. Ltd. amounting to Rs. 2 lakhs and by Mr. Umesh Kumar amounting to Rs. 1 lakh are deleted

Summary

Issues:
Assessment of increase in share capital due to issue of shares, application of section 68 of the Income-tax Act, burden of proof on the Department, genuineness of share application money from various sources, sustaining additions on the basis of lack of confirmation, existence of investors, relevance of confirmation letters, grounds for deletion of additions, discrepancies in the Assessing Officer's findings, reliance on previous judgments.

Analysis:
The appeal pertains to the assessment of an assessee against the order of the Income-tax Appellate Tribunal regarding the increase in share capital during the assessment year 1997-98. The Assessing Officer added the share application money as unexplained cash credits under section 68 of the Income-tax Act due to alleged lack of credit-worthiness. The Tribunal found that while most sources of share application money were genuine, the genuineness of transactions with Westbury Invest Trade P. Ltd. and an individual named Umesh Kumar was not established. The Tribunal upheld the addition of Rs. 2 lakhs from Westbury Invest Trade P. Ltd. and Rs. 1 lakh from Umesh Kumar.

The substantial questions of law framed by the court revolved around the burden of proof on the Department to show the source of investment and the Tribunal's alleged error in not considering furnished confirmations. The Tribunal applied the principle from the Delhi High Court's decision in CIT v. Stellar Investment Ltd., emphasizing that the burden shifts to the Revenue once the existence of investors is proven by the assessee. The Tribunal's decision was based on the non-existence of Westbury Invest Trade P. Ltd. and Umesh Kumar or other grounds.

Upon scrutiny, it was found that the Tribunal did not reject the existence of the investors but sustained additions on different grounds. The Assessing Officer's reasoning for not considering Westbury Invest Trade P. Ltd.'s confirmation was not upheld by the Tribunal, which highlighted discrepancies in the assessment process. The Tribunal also noted that efforts to serve notices to creditors were inadequate, impacting the decision-making process.

Ultimately, the Tribunal's decision to sustain additions lacked proper justification. The confirmation letter from Westbury Invest Trade P. Ltd. was on record, contradicting the basis for the addition. Similarly, the existence of Umesh Kumar was acknowledged, but the real investor behind the share application was not investigated. Therefore, the additions on account of investments by Westbury Invest Trade P. Ltd. and Umesh Kumar were deleted, setting aside the Tribunal's order in this regard.

In conclusion, the appeal was allowed, and the additions made on the share capital investments by Westbury Invest Trade P. Ltd. and Umesh Kumar were removed. The judgment highlighted the importance of proper verification and adherence to legal principles in assessing share application money to ensure fair treatment of the assessee.

This comprehensive analysis covers the issues raised in the judgment, providing a detailed breakdown of the assessment process, legal principles applied, and the Tribunal's decision-making rationale.