Addition for Subscription to share Capital by Kolkata based companies

CA Sandeep Kanoi

In the case of Orchid Industries Pvt. Ltd. Vs. DCIT ITAT Mumbai deleted the addition made in respect of Share Capital Subscription received by the Assessee Company from Kolkata based Companies. ITAT has relied on the case of CIT Vs. Lovely Exports Pvt. Ltd. (supra) in which Hon’ble Supreme Court, has held that if the share application money is received by the assessee company from alleged bogus shareholders whose names are given to the AO then the department is free to proceed to reopen their individual assessment in accordance with law but it cannot be regarded as undisclosed income of the assessee company.

Facts of the case- Assessee is a private limited company engaged in the business of manufacturing of embroidery laces. During the assessment proceedings, the AO noted that in the balance sheet as on 31-3-2004, the assessee has received share capital to the tune of Rs.51,50,000/- and Rs.1,21,50,000/- as share premium. The assessee was asked by the AO to produce the complete name, full address of the shareholders, the amount received from them, PAN and Income Tax particulars of the shareholders as well as mode of share capital including premium.

In response, the assessee filed the details vide letter dated 13-11-2006. From the details furnished by the assessee the AO noted that the majority of the shareholders were from Kolkata. Accordingly, a letter dated 15-11-2006 was issued to the ADIT(Investigation Unit) Kolkata to conduct an enquiry with regard to the identity of the creditors, genuineness of the transactions and creditworthiness of the creditors. The ADIT(Inv.) Kolkata submitted enquiry report, wherein it has been stated that for verification of the creditors, summons under Section 131 were issued to the parties. Since there was no compliance of summons and the whereabouts of the parties could not be located as far as five creditors and, therefore, it was observed that the existence of the parties appears to be doubtful. In case of two creditors the summons were duly served and in response the representative of the creditors  were appeared before the ADIT (Investigation), Kolkata, however, it was observed in the report that these companies were only paper company and used by the assessee to bring its unaccounted money back in the form of share capital. Based on the report of the ADIT(Investigation) Kolkata, the AO made an addition of Rs. 95 lakhs as unexplained cash credit under Section 68 of the Act. This addition was made in respect of share application money with premium claimed to have been received from 7 parties, out of total 13 parties.

Held :–

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