2010 (8) TMI 652 - HC - Income Tax

High Court upholds ITAT decision on unexplained share application money, emphasizing shareholder identity.

The High Court upheld the ITAT's decision to delete the addition of unexplained share application money, emphasizing the importance of establishing ... Addition - Unexplained share application money - Identity, creditworthiness and genuineness of the transaction - Held that:- in respect of money introduced by way of share capital, and the assessee-company furnished the names and particulars of shareholders for establishing their identity, the department may proceed to reopen the assessments of all such alleged bogus shareholders whose investment in the share capital is found to be unexplained - As per the the decision of Supreme Court in CIT v. Lovely Exports (P.) Ltd. [2008 -TMI - 76942 - SUPREME COURT OF INDIA], held that the share application money of Rs. 18,00,000 cannot be regarded as undisclosed income of assessee under section 68 of Act, 1961 - Decided in favour of assessee. Issues:Challenge to the order of the Income-tax Appellate Tribunal regarding the addition of unexplained share application money under section 68 of the Income-tax Act, 1961 for the assessment year 1998-99.Analysis:Issue 1: Addition of Rs. 18,00,000 as unexplained share application moneyThe appellant challenged the ITAT's decision to delete the addition of Rs. 18,00,000 made by the Assessing Officer under section 68 of the Income-tax Act, 1961. The counsel for the revenue argued that the primary onus was not discharged by the respondent-assessee regarding the identity, creditworthiness, and genuineness of the transaction. However, upon review, it was found that the ITAT had deleted the addition based on the identification of share applicants, allowing the revenue to reopen assessments of alleged bogus shareholders. The ITAT referred to various judgments, including the decision in CIT v. Lovely Exports (P.) Ltd., emphasizing that when share application money is received from alleged bogus shareholders, the department can proceed to reopen their individual assessments. The court concurred with this approach, dismissing the appeal and upholding the decision that the share application money cannot be considered undisclosed income under section 68 of the Act.Issue 2: Legal Precedents and ObservationsThe judgment cited legal precedents such as the decision in CIT v. Lovely Exports (P.) Ltd., where it was established that share application money from alleged bogus shareholders can lead to reopening of individual assessments. The court highlighted that the department has the authority to reopen assessments of such shareholders. The judgment also referenced the difficulty for an assessee to prove the creditworthiness of strangers, indicating that if there are doubts about the ability to make investments, assessments may be reopened by the department. These observations reinforced the principle that when the identity of shareholders is established, the department can proceed to reopen assessments if necessary.ConclusionIn conclusion, the High Court upheld the ITAT's decision to delete the addition of unexplained share application money, emphasizing the importance of establishing shareholder identity and allowing the department to reopen assessments of alleged bogus shareholders. The judgment aligned with legal precedents and the provisions of the Income-tax Act, ultimately dismissing the appeal and affirming that the share application money in question could not be considered undisclosed income under section 68 of the Act.This comprehensive analysis of the judgment provides a detailed overview of the issues involved, the legal arguments presented, the court's observations, and the final decision rendered by the High Court.