2012 (9) TMI 797 - AT - Income Tax

Tribunal upholds deletion of share application money addition as undisclosed income

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the addition of share application money as income from undisclosed ... Addition u/s 68 - Share application money – addition made on ground that though Share applicants are assessees but their level of income is not sufficient enough to make investments in the company, moreover they are first time assessee – Held that:- CIT(A) has deleted the addition on the basis that applicants are long time assessees and they might have taken some loans from family members for making investment into the company which does not seem to be correct as there is no evidence of old income tax return or statement of share applicants that they had taken loans from some family members for investment into the company. However in view of decision in case of CIT v. Lovely Exports Pvt. Ltd.(2008 (1) TMI 575 - SUPREME COURT OF INDIA ) wherein it was held that if the names & addresses and confirmation from shareholders has been provided by the company to the AO then the share application money cannot be added in the income of the company u/s 68 and instead the Department is free to reopen the assessment of such individual in accordance with law, we do not see any reason to interfere in the order of CIT(A). Yet, it is opined that the individual assessments of the alleged shareholders should be reopened and in view of that Department is directed to issue instructions to all jurisdictional AO to reopen the individual cases of all shareholders as listed by AO – Decided against Revenue Issues involved:- Addition of share application money as income from undisclosed sources- Assessment of legitimacy of share applicants and their investments- Application of Section 68 of the Income Tax Act, 1961Issue 1: Addition of share application money as income from undisclosed sourcesThe case involved an appeal filed by the revenue against the CIT(A) order deleting the addition of Rs. 40 lakhs as share application money out of a total of Rs. 14 crores. The revenue contended that the share applicants had opened bank accounts on specific dates and had income below taxable limits, raising suspicions about the legitimacy of the investments. The Assessing Officer (AO) noted discrepancies in the bank accounts and the source of funds used for share application money. The appellant argued that all share applicants were genuine, identifiable, and creditworthy, providing income tax returns as evidence. The appellant also cited legal precedents to support their case, emphasizing that if all investment details are provided, addition under Section 68 cannot be made.Issue 2: Assessment of legitimacy of share applicants and their investmentsThe AO raised concerns about the share applicants' income levels, their sources of funds, and the timing of bank account openings. The AO observed that most share applicants had income below taxable limits, were engaged in low-income jobs, and had filed tax returns for the first time. The AO made a total addition of Rs. 40 lakhs based on these findings. The appellant, however, argued that all transactions were legitimate, with share application money received through account payee cheques, shares duly allotted, and all shareholders providing necessary details, making them identifiable and creditworthy. The appellant relied on legal judgments supporting their position and contended that the share application money could not be treated as the company's income.Issue 3: Application of Section 68 of the Income Tax Act, 1961The AO invoked Section 68 of the Income Tax Act, 1961, to justify the addition of share application money as income from undisclosed sources. The AO questioned the legitimacy of the investments based on the discrepancies in the share applicants' income levels and the timing of transactions. The CIT(A), however, deleted the addition, emphasizing that the share applicants were identifiable, long-time assessees, and had provided necessary documentation. The CIT(A) referenced various court judgments supporting the principle that once the identity of shareholders is established, no addition can be made in the hands of the company. The Tribunal, following the precedent set by the Hon'ble Supreme Court in a similar case, upheld the CIT(A)'s decision, directing the Department to reopen individual assessments of the alleged share holders instead of adding the share application money to the company's income.In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the addition of share application money as income from undisclosed sources. The judgment underscored the importance of establishing the legitimacy of share applicants and their investments, as well as the application of legal principles under Section 68 of the Income Tax Act, 1961.