2013 (1) TMI 450 - HC - Income Tax

Cash Credit u/s 68 - Creditworthiness and genuineness of the transaction - Amount received by the assessee-company from share-holders/share-applicants, prior to the commencement of its business operations would be a capital receipt or income from undisclosed sources u/s 68 - Total investment in the share capital was Rs. 1.49 Crore and unsecured loans stood at Rs. 13.,50 lakhs - Tribunal held that share capital or loans before the commencement of commercial operations were of capital nature Held that - Following the decision in case of Power Drugs Ltd. (2011 (7) TMI 235 - PUNJAB AND HARYANA HIGH COURT) unequivocal terms held that the primary onus was on the assessee was to establish the identity, creditworthiness and genuineness of the transaction in order to escape from the provisions of section 68 The statutory requirement for treating any amount as income of the assessee u/s 68 is where the assessee fails to justify and establishes the genuineness of the entry in the books of account - In favour of revenue

Summary

Issues:
1. Whether the amount received by the assessee-company from shareholders prior to business operations is a capital receipt or income from undisclosed sources under Section 68 of the Income Tax Act, 1961?
2. Whether an amount received from shareholders with established identities is liable to be assessed as income from undisclosed sources under Section 68 of the Income Tax Act, 1961?

Analysis:
1. The judgment pertains to ITA Nos. 80 and 146 of 2005, where the revenue appealed against an order passed by the Income Tax Appellate Tribunal. The key issue was whether amounts received by the assessee-company before commencing business operations should be treated as capital receipts or income from undisclosed sources under Section 68 of the Income Tax Act, 1961. The Assessing Officer noted unexplained amounts received towards share capital/loans, leading to an income assessment under Section 143(3) of the Act. However, the Commissioner of Income Tax (Appeals) deleted the addition, stating that pre-business operation receipts cannot be taxed. The Tribunal upheld this decision, considering the amounts as capital in nature, prompting the revenue's appeal.

2. The revenue contended that the investment in share capital lacked credibility and was undisclosed, falling under Section 68 of the Act. They argued that the CIT(A) erred in deleting the additions, while the Tribunal incorrectly classified the share capital money as capital in nature, excluding it from Section 68. The respondent, on the other hand, supported the Tribunal's orders in both cases.

3. The High Court found errors in the decisions of both the CIT(A) and the Tribunal, emphasizing Section 68 of the Act. The provision mandates that unexplained sums in an assessee's books are taxable unless adequately explained. The timing of the amount's introduction, whether before or after business commencement, is irrelevant. The Court referred to the Power Drugs Limited case, highlighting the onus on the assessee to establish transaction genuineness to avoid Section 68 implications.

4. Considering conflicting judgments cited by both parties, the Court clarified that the primary burden rests on the assessee to prove transaction legitimacy. The CIT(A) and Tribunal's decisions were overturned, and the matter was remitted to the CIT(A) for a merit-based review in accordance with the law. Consequently, both appeals were allowed in favor of the revenue, answering the substantial questions of law against the assessee.