INCOME TAX ACT, 1961

Section 68

Income from undisclosed sources - Addition under section 68 - Receipt of share capital/premium - Identity, creditworthiness and genuineness of transaction not proved

AO required assessee to provide details with respect to amount shown to have been received as share capital/premium from various entities. Assessee submitted that entire share capital had been received by it through normal banking channels and produced documents such as, income-tax return acknowledgments of the investors. AO issued summons to representatives of investor companies. Despite summons having been served, nobody appeared on behalf of any of the investor companies. The department only received submissions through dak, which created a doubt about identity of investor companies. Thereafter, AO independently got field enquiries conducted at Mumbai, Kolkatta, and Guwahati where these companies were stated to be situated. With respect to the Mumbai and Guwahati Companies, enquiries revealed that same were non-existent at the given address. With respect to the Kolkata companies, the response came through dak only. However, nobody appeared, nor did they produce their bank statements to substantiate source of funds from which alleged investments were made. Taking note of all this, AO treated share capital/premium as unexplained cash credit and accordingly, made addition under section 68. The CIT(A) deleted addition which was confirmed by Tribunal on appeal, High Court affirmed the order of Tribunal, holding no question of law arose. Held: Mere mention of income tax file number of investors was not sufficient to discharge onus under section 68. It was worth noting that how could investor companies having filed income-tax returns with a meagre or nil income, invest such huge sums of money in assessee-company. Also, no explanation, whatsoever, was offered as to why investor companies had applied for shares of assessee-company at a high premium of Rs. 190 per share, even though face value of share was Rs. 10 per share. Further, field enquiry conducted by AO clearly revealed that in several cases investor companies were found to be non-existent. Thus, assessee clearly failed to prove identity and creditworthiness of share applicants and genuineness of transaction and, therefore, addition made under section 68 was justified. Editor's Note: The Supreme Court summerised issues as under The principles which emerge where sums of money are credited as Share Capital/Premium are :-- (i) The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and creditworthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the assessing officer, so as to discharge the primary onus. (ii) The assessing officer is duty bound to investigate the creditworthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. (iii) If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack creditworthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by section 68 of the Act. The practice of conversion of unaccounted money through the cloak of Share Capital/Premium must be subjected to careful scrutiny. This would be particularly so in the case of private placement of shares, where a higher onus is required to be placed on the assessee since the information is within the personal knowledge of the assessee. The assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the assessing officer, failure of which, would justify addition of the said amount to the income of the assessee. Clearly the assessee, Company-Respondent, failed to discharge the onus required under section 68 of the Act, the assessing officer was justified in adding back the amounts to the assessee's income.

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