2011 (6) TMI 789 - HC - Income Tax

High Court rules in favor of assessee, quashing unexplained cash credits addition. Share capital /= undisclosed income.

The High Court admitted the appeal and ruled in favor of the assessee, quashing the addition of unexplained cash credits. It emphasized that share capital ... Unexplained Cash Credits u/s 68 - As per AO the creditors were not creditworthy and they were not assessed to tax; hence, the assessee has failed to explain the source of such cash - HELD THAT:- The Supreme Court in the case of COMMR. OF INCOME TAX VERSUS M/S LOVELY EXPORTS (PVT) LTD [2008 (1) TMI 575 - SC ORDER], has held that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. In the case of COMMISSIONER OF INCOME TAX VERSUS STELLER INVESTMENT LTD. [2000 (7) TMI 76 - SC ORDER], the Supreme Court agreed with the decision of the Delhi High Court in the case of COMMISSIONER OF INCOME-TAX VERSUS STELLAR INVESTMENT LIMITED [1991 (4) TMI 100 - DELHI HIGH COURT], wherein the Court had held that, it is evident that even if it is assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons. In the circumstances, in the light of the aforesaid decisions, the Department is free to proceed to reopen the individual assessments of the depositors named by the assessee, however, under no circumstances, can the amount of share capital be regarded as the undisclosed income of the assessee - Decision in favour of Assessee. Issues involved:Challenge to addition of unexplained cash credits in the assessment under the IT Act, 1961 for the assessment year 1992-93.Detailed Analysis:1. Substantial Question of Law Formulated by the Court:The High Court admitted the appeal under section 260A of the IT Act, 1961 and formulated a substantial question of law regarding the justification of confirming the addition of Rs. 4,30,760 on account of unexplained cash credits in the case of the assessee company. The question focused on whether the Tribunal was legally correct in confirming the said addition.2. Background and Assessment Proceedings:During the assessment proceedings, the AO found that the assessee had introduced cash in its books in the form of share capital from 12 persons. While cash related to 7 persons was offered for tax under VDIS, 1997, the source of cash from the remaining 5 persons, including Uday Vaidya, could not be explained. The AO concluded that the creditors were not creditworthy and failed to explain the source of the cash. The CIT(A) and the Tribunal upheld this decision.3. Legal Arguments and Precedents:The appellant relied on the decision in CIT vs. Lovely Exports (P) Ltd., emphasizing that if share application money is received from alleged bogus shareholders, the Department can proceed to reopen individual assessments but cannot treat it as undisclosed income of the company. The respondent argued that the identity of the subscribers was not established, especially in the case of Uday Vaidya.4. Court's Analysis and Conclusion:The Court examined the facts in light of relevant legal precedents and found that the controversy was settled by previous decisions. It was noted that the Revenue did not claim the subscribers were bogus but questioned the source of cash and creditworthiness. The Court emphasized that share capital cannot be treated as undisclosed income of the company. Even in the case of Uday Vaidya, where the source was questioned, the Court found that the amount could not be assessed in the hands of the company.5. Judgment and Ruling:The Court ruled in favor of the assessee, quashing the Tribunal's order confirming the addition of unexplained cash credits. The Court held that the Department could proceed to reopen individual assessments of the depositors but could not treat the share capital as undisclosed income of the company. The appeal was allowed with no costs awarded.By analyzing the issues involved, legal arguments presented, and the Court's ruling, the judgment clarified the treatment of unexplained cash credits in the assessment of a company under the IT Act, 1961, providing guidance based on established legal principles and precedents.