2013 (2) TMI 498 - AT - Income Tax

Addition u/s 68 Assessee received share application money from M/s. Deevee Commercial Ltd AO treated the amount received as unaccounted money Search & seizure operation conducted at Gouri Business Centre u/s. 132 and in course of such operation, statements of the six persons were recorded u/s. 132(4) From the statements of the above six persons, it was clear that Deevee Commercial Ltd. is nothing but a paper company/ jamakharchi company which is used to channelise unaccounted money by way of share application money Held that - Addition u/s. 68 of the Act can be made where an assessee fails to prove identity of the creditor; his creditworthiness and genuineness of the transaction As decided in Nemichand Kothari vs. CIT 2003 (9) TMI 62 - GAUHATI HIGH COURT where an assessee receives any money by account payee cheque from another person, then u/s. 106 of the Evidence Act the assessee can be said to have established the genuineness and creditworthiness of the payer. In CIT vs. Value Capital Services Pvt. Ltd. 2008 (4) TMI 263 - DELHI HIGH COURT it was held that there was additional burden on the department to show that even if the share-applicants did not have means to make investments, the investments made by them actually emanated from the coffers of the assessee In this case no such evidence was brought to prove that the assessee s unaccounted money routed through M/s. Deevee Commercial Ltd. or any cash was deposited in the share applicant s bank account prior to issuance of cheque for share application. Transaction was by account payee cheque. PAN details of the share applicant were provided ,therefore, the onus cast on the assessee u/s. 68 of the Act, was duly discharged when all the ingredients contained in Sec. 68 of the Act are fulfilled, there is hardly any scope to invoke that section alleging introduction of unexplained fund by way of share application As decided in CIT vs. M/s. Lovely Exports (P) Ltd 2008 (1) TMI 575 - SUPREME COURT OF INDIA no addition on account of unexplained cash credit is warranted in the case of the assessee on the given facts and circumstances. Further assessee filed a copy of Memorandum and Articles of Association of the assessee-company along with details of Demat Account - assessee purchased shares of M/s. Himadri Chemicals and M/s. Indo Tech Ltd. out of the share application money received from M/s. Deevee Commercial Ltd In past the assessee has not been indulging in share trading business AO was directed to treat the surplus as short-term capital gain instead of business income Against the revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 2.45 crores made u/s. 68 of the Act.
2. Treatment of profit of Rs. 24,73,929/- from share transactions as short-term capital gain instead of business income.

Detailed Analysis:

1. Deletion of Addition of Rs. 2.45 Crores u/s. 68 of the Act:

The department contested the deletion of an addition of Rs. 2.45 crores made by the Assessing Officer (A.O.) under Section 68 of the Income Tax Act, 1961, which was initially added as unexplained cash credit. The A.O. had determined that the share application money received from M/s. Deevee Commercial Ltd. was unaccounted money, based on statements recorded during a search and seizure operation. The A.O. concluded that M/s. Deevee Commercial Ltd. was a paper company used to channelize unaccounted money into regular books.

The assessee argued that the share application money was genuine, supported by the fact that M/s. Deevee Commercial Ltd. was assessed to tax, and the transactions were through account payee cheques. The assessee provided PAN details and other relevant information to establish the identity and creditworthiness of the share applicant.

The Commissioner of Income Tax (Appeals) [C.I.T.(A)] deleted the addition, stating that the conditions for invoking Section 68 were not satisfied. The identity of the share applicant was known, and the transactions were through account payee cheques. There was no evidence to suggest that M/s. Deevee Commercial Ltd. was hard up for funds. The A.O.'s reliance on statements recorded u/s. 132(4) was deemed insufficient as the statements did not directly link the unaccounted money to the assessee.

The Tribunal upheld the C.I.T.(A)'s decision, emphasizing that the identity, creditworthiness, and genuineness of the transaction were established by the assessee. The Tribunal noted that the A.O. did not conduct independent inquiries and relied solely on statements from the search operation. Citing various judicial precedents, the Tribunal concluded that the onus was on the department to prove that the share application money was the assessee's unaccounted income, which the department failed to do.

2. Treatment of Profit of Rs. 24,73,929/- from Share Transactions:

The second issue involved the treatment of a profit of Rs. 24,73,929/- earned from transactions in shares of M/s. Himadri Chemicals Ltd. and M/s. Indo-Tech Transformer Ltd. The A.O. treated this profit as business income, arguing that the investments were not made from the assessee's own surplus funds but from share application money received from M/s. Deevee Commercial Ltd.

The assessee contended that it was an investment company since its incorporation and had consistently treated gains from share transactions as capital gains. The investments were accounted for as investments in the balance sheet, and there was no history of trading in shares.

The C.I.T.(A) agreed with the assessee, noting that the source of funds for the share purchases was the share application money. The C.I.T.(A) found no merit in the A.O.'s logic and observed that the A.O. did not provide any evidence to contradict the assessee's claim. The C.I.T.(A) directed the A.O. to treat the profit as short-term capital gain.

The Tribunal upheld the C.I.T.(A)'s decision, stating that the assessee had established the nature of the transactions as investments. The Tribunal found no evidence to suggest that the assessee was engaged in trading shares. Consequently, the Tribunal directed the A.O. to treat the profit as short-term capital gain, dismissing the department's appeal.

Conclusion:

The Tribunal dismissed the department's appeal, upholding the C.I.T.(A)'s decisions on both issues. The addition of Rs. 2.45 crores u/s. 68 was deleted, and the profit of Rs. 24,73,929/- from share transactions was treated as short-term capital gain.