2012 (10) TMI 676 - HC - Income Tax

High Court affirms treatment of share application money under Income Tax Act

The Allahabad High Court ruled in an Income Tax Appeal case concerning the treatment of share application money under Section 68 of the Income Tax Act, ... Undisclosed income under sec 68 - Held that:- As decided in CIT v. Lovely Exports (P) [2006 (11) TMI 121 - DELHI HIGH COURT] where the identity of shareholders stood proved on record, the amount of share application money could not be added to the income of the assessee. As in this cases undoubtedly and clearly the identity of all the share applicants stood proved on record A.O lost sight of the fact that these are not ordinary cash credit appearing in the books of accounts of the assessee but these are share application moneys which cannot be treated like cash credit when identity of the share applicants gets established on record - in favour of assessee. Issues:Income Tax Appeal under Section 260-A of the Income Tax Act, 1961; Consideration of substantial questions of law regarding share application money; Disallowance of share application money under Section 68 of the Act; Onus of establishing capacity, genuineness, and capabilities of share investors; Tribunal's decision based on identity of shareholders; Legal position on treatment of share application money; Reopening individual assessments of alleged bogus shareholders; Shift of onus on Revenue once identity of shareholders is established; Precedents set by judgments in Lovely Exports (P) Ltd and Jaya Securities Limited cases; Findings of the Income-Tax Appellate Tribunal (ITAT) and High Court.Analysis:The Income Tax Appeal before the Allahabad High Court involved substantial questions of law related to the treatment of share application money under Section 68 of the Income Tax Act, 1961. The Assessing Officer had added the entire share application money to the income of the respondent-assessee, as they failed to establish the capacity, genuineness, and capabilities of the share investors. The CIT (A) confirmed this addition, emphasizing the lack of proof regarding the share investors' financial standing. However, the Tribunal, citing precedents like the Supreme Court's judgment in Lovely Exports (P) Ltd case and the High Court's ruling in Jaya Securities Limited case, held that once the identity of shareholders is established, the share application money cannot be added to the assessee's income but should be taxed at the hands of the investors.The Tribunal's decision was based on the established identity of the share applicants, supported by affidavits, bank passbooks, PAN cards, and acknowledgment of returns. The Tribunal disagreed with the Assessing Officer's approach, stating that share application money, when the identity of shareholders is proven, cannot be treated as cash credit. The Tribunal highlighted that the onus shifts to the Revenue once the identity of shareholders is established, as per legal precedents. The High Court concurred with the Tribunal's findings, emphasizing that once the identity of shareholders is established, the assessee's obligation is fulfilled, and no further proof of creditworthiness or genuineness is required.The High Court's judgment was in line with the decisions in Lovely Exports (P) Ltd and Jaya Securities Limited cases, which established that even if share applicants are found to be bogus, the share application money cannot be considered as undisclosed income of the company. The Court dismissed the Income Tax Appeal, ruling in favor of the respondent-assessee based on the established legal principles and precedents. The questions of law were answered in favor of the respondent-assessee, upholding the Tribunal's decision and the legal position regarding the treatment of share application money when the identity of shareholders is proven.