2012 (2) TMI 528 - AT - Income Tax

Tribunal rules share applicants identified, no Section 68 addition justified. Department can't add in company's hands.

The Tribunal concluded that the identity of the share applicants was established, and hence, no addition under Section 68 was justified in the hands of ... Cash credit under section 68 - Prima facie proof of identity, creditworthiness and genuineness - Onus on assessee and shifting of burden - Effect of dismissal of SLP by the Supreme Court (non speaking order) on applicability of earlier judgmentCash credit under section 68 - Prima facie proof of identity, creditworthiness and genuineness - Whether the sum of Rs. 30 lakhs shown as share application money was exigible to tax as unexplained cash credit under section 68 in the hands of the assessee - HELD THAT: - The Tribunal examined the material on record and found that summons issued to the four share applicants were duly served and confirmations together with bank statements were filed by those entities, thereby establishing their identity and addresses. Applying established law that the assessee must prima facie prove identity, capacity and genuineness, the Tribunal held that identity of the subscribers had been proved. Although the Assessing Officer and the Commissioner of Income Tax (Appeals) formed adverse conclusions about the subscribers being paper companies and about creditworthiness/genuineness, the Tribunal found that on the facts of this case the condition precedent under section 68 (identification of subscribers) was satisfied and therefore the Assessing Officer could not sustain the addition in the assessee's hands under section 68 without proceeding against the subscribers themselves. [Paras 4, 6, 7]Addition of Rs. 30 lakhs under section 68 in the hands of the assessee is not warranted and the appeal is allowed.Effect of dismissal of SLP by the Supreme Court (non speaking order) on applicability of earlier judgment - Onus on assessee and shifting of burden - Whether the dismissal simpliciter of the Department's SLP in Lovely Exports precludes making an addition under section 68 where the identity of share subscribers is established - HELD THAT: - The Tribunal analysed the precedents on non speaking dismissals of SLP and the doctrine of merger. It noted the Supreme Court's dismissal in Lovely Exports and, on the facts there and in the present case, concluded that where the assessee establishes the identity of the subscribers, the Revenue's remedy is to proceed against those subscribers in accordance with law rather than to treat the amount as unexplained cash credit in the company's hands. The Tribunal applied Lovely Exports to hold that once identity is established by service of summons and confirmations, no addition under section 68 could be sustained against the recipient company merely because the Revenue later considers the subscribers to be bogus. [Paras 4, 5, 7]Lovely Exports (dismissal of SLP) supports that, given proved identity of subscribers, the Department must proceed against subscribers and cannot sustain an addition under section 68 in the company's hands; thus the addition cannot be upheld.Final Conclusion: On the facts - service of summons on the share applicants and filing of confirmations and bank statements establishing identity - the Tribunal held that the assessee discharged the prima facie requirement under section 68; applying the Supreme Court's dismissal in Lovely Exports, the addition of Rs. 30 lakhs under section 68 in the hands of the assessee was not sustainable and the appeal was allowed. Issues Involved:1. Whether the sum of Rs. 30 lacs received as share application money by the assessee is assessable as cash credit under Section 68 of the Income Tax Act, 1961.2. Whether the identity, creditworthiness, and genuineness of the share applicants were satisfactorily established by the assessee.Issue-wise Detailed Analysis:1. Assessability of Rs. 30 lacs as Cash Credit under Section 68:The primary issue was whether the sum of Rs. 30 lacs received by the assessee as share application money can be assessed as cash credit under Section 68 of the Income Tax Act, 1961. The Assessing Officer (AO) treated the amount as unexplained cash credit, citing the lack of satisfactory evidence regarding the identity, creditworthiness, and genuineness of the share applicants. The AO observed that the financial capacity of the share subscribers was not sound and concluded that the transactions were manipulated to introduce unaccounted money as share application money.2. Establishment of Identity, Creditworthiness, and Genuineness:The assessee argued that the identity of the share applicants was proved, referencing the Supreme Court decision in Lovely Exports (P) Ltd., which held that if the share application money is received from alleged bogus shareholders whose names are provided to the AO, the Department is free to reopen their individual assessments but cannot add the amount under Section 68 in the hands of the company. The assessee provided details, addresses, and PAN numbers of the companies from whom the share application money was received. Notices issued under Section 133(6) to these companies returned unserved, prompting the AO to demand the production of the share applicants, which the assessee failed to do.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that the assessee failed to explain the soundness of the share applicants' financial decisions and that the companies were merely paper entities without genuine financial worth. The CIT(A) noted that the share application money remained pending allotment for an extended period, indicating dubious financial practices.Upon appeal, the Tribunal considered the rival submissions and the material on record. The Tribunal noted that the assessee provided confirmations from the share applicants, along with their bank statements and income tax return acknowledgments. The Tribunal found that the identity of the share applicants was established as the summons issued to them were duly received, and they provided confirmations of the share application money.The Tribunal referred to the Supreme Court decision in Lovely Exports (P) Ltd., which stated that if the identity of the share applicants is proved, no addition under Section 68 can be made in the hands of the company, even if the share applicants are alleged to be bogus. The Tribunal distinguished the present case from other cases cited by the Department, where the identity of the share applicants was not proved or their addresses were found to be non-existent.Conclusion:The Tribunal concluded that the identity of the share applicants was proved, and therefore, no addition under Section 68 was warranted in the hands of the assessee company. The Tribunal allowed the appeal of the assessee, emphasizing that if the Department finds the share applicants to be bogus, they are free to reopen their individual assessments but cannot make additions under Section 68 in the hands of the assessee company.Final Order:The appeal of the assessee was allowed, and the order was pronounced in open Court on 6th February 2012.