Section 68 inapplicable to share application money from non-resident companies, proviso only covers resident shareholders

ITAT Mumbai held that section 68 does not apply to share application money received from non-resident companies. The tribunal ruled that the proviso to section 68, effective from AY 2013-14, only requires establishing the source of funds for resident shareholders, not non-resident shareholders. The assessee company received confirmation letters from the Swedish company regarding share application money. Since the basis for premium was not required until AY 2012-13 and proper justification existed for shares issued to the holding company at Rs. 10 premium per share, the addition made by AO under section 68 was deleted. Appeal decided in favor of assessee.

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Issues Involved:
1. Addition made under section 68 of the Income Tax Act for unexplained cash credit of share allotment.
2. Allowing set off of brought forward losses against the addition made.

Issue-wise Detailed Analysis:

1. Addition made under section 68 of the Income Tax Act for unexplained cash credit of share allotment:

The assessee, a closely held company engaged in marketing public issues for Indusind Bank Ltd., filed its return of income for A.Y. 2012-13 on 29.09.2012 declaring NIL income after claiming brought forward losses from A.Y. 2008-09. The Assessing Officer (AO) made an addition of Rs. 2,02,79,380/- under section 68 of the Income Tax Act on account of unexplained cash credit related to share allotment. The share application money was received during the Financial Years 2007-08 and 2008-09, and shares were allotted in the Financial Year 2011-12 relevant to A.Y. 2012-13. The AO taxed the entire receipt during the year under consideration under section 68.

The CIT(A) confirmed the AO's action, and the assessee appealed further. The Tribunal noted that the share application money was received in earlier years and was part of the opening balance for A.Y. 2012-13. Since no new amount was received in A.Y. 2012-13, the Tribunal held that section 68 could not be invoked for the opening balance, relying on various judicial pronouncements:
- DCIT vs. Global Mercantiles (P.) Ltd.: Section 68 cannot be invoked if the share application money was received in an earlier year.
- CIT vs. Jagatkumar Satishbhai Patel: Additions under section 68 cannot include opening balances from previous years.
- CIT vs. Usha Stud Agricultural Farms Ltd.: Past cash credits appearing in books over several years cannot be added under section 68.
- CIT vs. Raghuvanshi Agro Industries (P.) Ltd.: Adjustments of entries without actual money flow are not subject to section 68.
- ITO vs. Nasir Khan J. Mahadik: Previous years' loans cannot be added as unexplained income in subsequent years.
- Soorai Leathers: Consent by the assessee does not give the authority to make an addition without statutory power.
- Suraj Bhan Bajaj vs. ITO: Deeming provisions cannot include receipts from other years.
- Pramod Kumar Dang vs. JCIT: Opening balances from earlier years cannot be added under section 68.

The Tribunal concluded that the amount of Rs. 2,02,79,380/- represented credits from earlier years and thus could not be added in A.Y. 2012-13. Additionally, the law under section 68 does not apply to remittances made by non-residents, which was further supported by the proviso to section 68 inserted from A.Y. 2013-14. The creditworthiness of non-resident shareholders does not need to be established by the assessee. The Tribunal also noted that the assessee had provided sufficient documentation to support the receipt of share application money from the foreign company, and the shares were allotted after obtaining necessary approvals from the RBI.

2. Allowing set off of brought forward losses against the addition made:

The assessee raised an alternate argument for allowing the set-off of brought forward losses against the addition made. However, since the Tribunal found no merit in the addition made by the AO under section 68, this issue became moot. The Tribunal allowed the appeal of the assessee, effectively nullifying the addition and rendering the set-off argument unnecessary.

Conclusion:

The Tribunal concluded that the addition of Rs. 2,02,79,380/- under section 68 was not justified as it represented credits from previous years and not the year under consideration. The appeal of the assessee was allowed, and the addition made by the AO was deleted. The Tribunal's decision was based on a thorough analysis of the facts and relevant judicial precedents.

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