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, ... Treatment of share application money under Section 68 as undisclosed income - onus of the assessee to establish identity of share applicants - shifting of onus to Revenue to investigate genuineness/creditworthiness after identity is proved - taxation of investors individually versus taxation of the company - scope of AO's duty to probe share subscription transactions - precedential effect of Lovely Exports and Jaya Securities on additions under Section 68Treatment of share application money under Section 68 as undisclosed income - onus of the assessee to establish identity of share applicants - precedential effect of Lovely Exports and Jaya Securities on additions under Section 68 - Whether the addition of share application money to the income of the assessee-company under Section 68 is sustainable where the identity of the share applicants is proved. - HELD THAT: - The Tribunal found that the assessee proved the identity of all share applicants by filing affidavits, statements of affairs, bank passbooks, PAN copies and return acknowledgements, and relied on the Supreme Court's decision in Commissioner of Income Tax v. Lovely Exports (P) Ltd and this Court's decision in Jaya Securities Limited v. CIT-II Kanpur. Applying those precedents, the Court held that once the identity of the shareholders stands established, the assessee's onus is discharged and the company cannot be treated as having undisclosed income on that basis. The proper course, according to the binding ratio, is that Revenue may proceed, if necessary, to reopen and investigate the individual investors' assessments; but additions against the company are not permissible solely because the shareholders' creditworthiness or genuineness is subsequently disputed. The High Court accepted the Tribunal's application of these precedents and answered the question in favour of the assessee. [Paras 8, 9]Addition of share application money to the income of the assessee-company under Section 68 deleted as identity of share applicants was established; question answered for the assessee.Shifting of onus to Revenue to investigate genuineness/creditworthiness after identity is proved - scope of AO's duty to probe share subscription transactions - taxation of investors individually versus taxation of the company - Whether the Assessing Officer was justified in treating share application moneys as cash credits and making additions despite the assessee proving the identity of the subscribers, and whether the AO is duty bound to further investigate the genuineness and creditworthiness of the subscribers before deleting the addition. - HELD THAT: - The Tribunal observed that share application money, unlike ordinary cash credits, cannot be treated as the company's undisclosed income once identity is proved; the onus then shifts to Revenue to show that the amounts are the company's income or to proceed against the individual subscribers. The Tribunal recorded detailed consideration of the material produced by the assessee and concluded that the AO erred in demanding proof of creditworthiness and genuineness from the company after identity had been established. The High Court agreed with the Tribunal's application of Lovely Exports and Jaya Securities, holding that the AO's duty to investigate the subscribers does not justify additions against the company where identity is not in doubt; any action on genuineness or bogusness lies against the individual investors. [Paras 6, 7]AO not justified in treating proved share application money as cash credits and making addition; further probe as to genuineness/creditworthiness must be directed at the shareholders individually, not the company.Final Conclusion: The substantial questions of law were answered in favour of the respondent-assessee and against the Revenue; the Tribunal's deletion of the addition of share application money was upheld and the Income Tax Appeal is dismissed. 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.