Once assessee has proved identity and creditworthiness of the share applicants, addition u/s 68 cannot be sustained

Brief of the case:

In this case tribunal examined that whether addition made u/s 68 can be sustained where the AO did not offer any comments upon the materials taken into account by the CIT (A) regarding identity and creditworthiness of the share applicants. Tribunal examined remand report submitted by AO before CIT (A) and observed that creditworthiness of the share applicants is not doubted.

Facts of the case:

• During AY 2003-04, the assessee had received Rs. 1.65 crores as share application money from three share applicants.
• These three amounts were returned by the assessee in the succeeding financial year 2004-05. It is a matter of record that the amounts were retained by the assessee for about 3-4 months.
• The AO disallowed the entire amount of Rs. 1.65 crores on the basis of his decision that the three entities, i.e. the share applicants did not have adequate resources.
• The AO’s decision was appealed before the CIT (Appeals) who considered the submissions of the parties and also took into account a remand report. In the course of the remand, it appeared that the three share applicants had transacted business and had in fact reported to the income tax.
• Following the decision of Hon’ble SC in Lovely Exports Ltd. 216 CTR 195 CIT (A) allowed the appeal of the assessee which is upheld by the ITAT. In this case Hon’ble SC held that once documents and details regarding share applicants is submitted by the assessee the revenue is free to open the case of shareholders but cannot make additions in hand of the assessee.

Contention of the revenue:

• AO had clearly noticed that there was hardly any business transacted by the share applicants which could have legitimately allowed them to invest large sums of money in the assessee’s shares.
• It is also contended that merely because the share applicants had a large volume of turnover did not mean that they had sufficient funds to invest in the assessee’s shares.

Contention of the assessee:

• The AO is failed to look into the business of the share applicants and their creditworthiness cannot be doubted.
• The case is covered by the decision of Hon’ble SC in the matter of Lovely Exports (Supra).

Held by the court:

• Remand Report sought by CIT (A) clearly pointed to the three share applicants not only being genuine business concerns but also having substantial business activities and further having reasonably sized turnovers.
• In these circumstances, to establish implausibility on the part of the share applicants to have possessed the means when they applied, the AO ought to have probed further.
• He did not do so as is evident from the Remand Report where the AO did not offer any comments upon the materials taken into account by the CIT (A). Hence, ITAT has rightly confirmed the order of CIT (A).

Comments by the author:

Once assessee has submitted documents related to identity, creditworthiness and genuineness of the transaction the onus of proving share application as bogus shifts on the revenue. If revenue fails to prove further then assessee connote be treated as bogus.