Share application money and s.68 treatment requires proof of identity and creditworthiness before being treated as undisclosed income

Share application money raised as issue under section 68 was held not to constitute undisclosed income where the company produced substantial evidence establishing the identity, creditworthiness and genuineness of the share applicants; accordingly such receipts could not be treated as unexplained income and were disallowed from being taxed as such. Where contributors alleged to be bogus are identified, the revenue remains free to reopen and investigate those contributors' individual assessments. The operative effect is that evidentiary proof of identity and creditworthiness defeats characterization of share application money as undisclosed income.

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Issues: Whether the share application money of Rs.1,70,00,000/- received by the assessee can be regarded as undisclosed income of the assessee under Section 68 of the Income-tax Act, 1961.

Analysis: The assessee produced bank statements, ledger/balance-sheet entries and assessment details of the alleged shareholder showing transfers as the source of funds and that the amount was reflected in the shareholder's books as advance. The Tribunal and appellate authority found that the identity and creditworthiness of the shareholder were established and that the share application money was supported by contemporaneous documentary evidence. Reliance was placed on the Supreme Court precedent which holds that where share application money is received from alleged shareholders, the departmental remedy lies in reopening or proceeding against those shareholders individually rather than treating the companys receipt as its undisclosed income under Section 68.

Conclusion: The share application money cannot be treated as undisclosed income of the assessee under Section 68; the appeal is dismissed and the Tribunal's order deleting the addition is upheld.

Ratio Decidendi: Where a company receives share application money supported by evidence establishing the identity and creditworthiness of subscribers and genuineness of the transaction, such receipts are not to be treated as the company's undisclosed income under Section 68; the appropriate course is to proceed against the individual subscribers if required.

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