Share capital and share premium additions under s.68 rejected where subscriber identity and source of funds were established

When a company receives share application money, the assessee must establish the identity, capacity and genuineness of subscribers; if these are proved, the department should seek assessment in the hands of the subscribers rather than treating amounts as undisclosed income. The tribunal found the assessee and the subscribing companies explained the nature and source of funds, with transactions routed through banking channels and the earlier investments evidenced in balance sheets, so mere suspicion by the assessing officer was insufficient to sustain an addition. Where the subscriber's source (and the source of that source) is established, the share capital and share premium cannot be taxed as undisclosed income - decided against revenue.

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Issues: Whether additions made by the Assessing Officer treating share application money, share capital and share premium received during AYs 2009-10 to 2013-14 as unexplained credits under section 68 of the Income-tax Act, 1961 are sustainable.

Analysis: The assessee produced confirmation letters, PAN details, audited financial statements, bank statements showing receipt through banking channels, returns of allotment and income-tax returns of the subscribing companies. The AO's enquiries extending through multiple intermediary layers and noting common directorships and involvement of an entry operator amounted to suspicions but did not produce positive material to contradict the documentary evidence. For years on or after 01/04/2013, the proviso to section 68 requires the subscriber also to furnish satisfactory explanation of source; the subscribing companies furnished evidence that funds were generated by encashing earlier investments and routed through banks. Judicial authorities hold that where the assessee establishes identity, genuineness and capacity of subscribers, the company cannot be treated as having undisclosed income and any action should be against the alleged subscriber if necessary.

Conclusion: The additions made under section 68 in respect of share application money, share capital and share premium for AYs 2009-10 to 2013-14 are not sustainable; the revenue's appeals are dismissed and the CIT(A)'s deletion of the additions is upheld.

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