2005 (4) TMI 33 - HC - Income Tax

Additions on account of unexplained share capital/share application money - Assessing Officer has held that the source of investment made by the investors had not been explained by the assessee and, therefore, the same has been held to be income of the company from undisclosed sources under section 68 - it is not denied that all the shareholders/share applicants are genuinely existing persons. It is also not denied that each of them is an income-tax assessee and the copies of the return of their income were also placed before the Assessing Officer by the assessee which fact is also not denied. - No material has been brought on record except inferring that the investors in the opinion of the Assessing Officer were not creditworthy to link the assessee with such investment of money made by those persons. Held that Merely because the creditors have tailed to prove their source of investment, the same cannot be added in the income of the assessee but it ought to be added by finding persons who had their names. Revenue appeal dismissed

Summary

Issues:
1. Addition of unexplained share capital/share application money under section 68 of the Income-tax Act, 1961.

Analysis:
The High Court of Rajasthan heard an appeal under section 260A of the Income-tax Act, 1961, against an order passed by the Income-tax Appellate Tribunal, Jodhpur Bench, regarding the assessment year 1997-98. The issue revolved around additions of Rs. 5,80,000 made by the assessing authority on account of unexplained share capital/share application money. The Assessing Officer added Rs. 70,000 as unexplained share capital invested by seven investors, and Rs. 5,10,000 received as share application money from various entities. The Tribunal, however, found that the investments were genuine, with investors providing confirmation letters and statements. The Department relied on a Full Bench decision of the Delhi High Court, while the assessee cited a Supreme Court decision in support of their case.

The Tribunal held that the additions were not justified as the investors were genuine, and their investments were properly documented. The High Court noted that the findings of the Tribunal were in line with previous decisions and did not go beyond the scope of established facts. Referring to a Division Bench decision, the court reiterated that once the initial burden of proving the identity of investors is met, the onus shifts to the Revenue to disprove the legitimacy of the investments. The court also highlighted the importance of establishing the existence of investors and their creditworthiness.

The court emphasized the significance of the burden of proof in cases of unexplained cash credits under section 68 of the Income-tax Act. It referenced previous decisions affirming that the burden lies on the assessee to establish the existence of investors, after which the Revenue must prove any alleged discrepancies. In the present case, since all shareholders/share applicants were genuine and income-tax assessees, and their returns were submitted to the Assessing Officer, the unexplained share capital/share application money additions were deemed unwarranted. The court concluded that no substantial question of law arose in the appeal and dismissed it accordingly.