INCOME TAX ACT, 1961

Section 68

Income from undisclosed sources - Addition under section 68 - Unexplained share application money -

AO noticed that in assessee's case share capital had been routed through two companies, the existence and operation of which remained only on paper and enquiries, which were conducted, were not only to lift the corporate veil of the assessee-company, but also that of intermediary companies, which acted as conduits. Further, based on the enquiry, it revealed that huge amounts were brought in assessee's books as share application money through the intermediary companies by shareholders, who could not properly explain their source. Therefore, AO held that section 68 got attracted and share application money, which was not explained, was to be taxed in the hands of assessee-company. Held: AO was within his right to probe genuineness and source of share application money received by assessee. Statements recorded from the persons had clearly established that needle of suspicion inevitably and inexorably pointed to one particular person and since suspicion was so overwhelming, AO had no other option except to trace origin of funds, which got channelized into assessee-company through the corporate entities. Further, AO while embarking upon such an enquiry, found that share application money was primarily contributed by two companies and an aggregate sum of Rs. 3 Crores was found to be contributed by three Mumbai based companies. During the course of enquiry, AO was able to establish that two persons, who were common directors in the two companies and who were alleged to have contributed, had no social standing or any financial capacity to bring in such amount of monies as share application monies. The statements revealed that those two persons acted as puppets under the instructions of a single person. Assessee miserably failed to discharge primary onus cast upon it. In fact, AO conducted a detailed enquiry, issued summons, recorded statements, permitted the authorized representative of assessee to peruse the seized records and in fact, came to a provisional conclusion as to how he intended to proceed and gave further opportunity to the authorized representative of the assessee, who had filed a written submission on 3-12-2007 raising certain factual issues and relying upon certain decisions. Those factual issues were considered and held to be not sustainable and decisions, which were relied upon by assessee, were also distinguished. Accordingly, addition made by AO was justified.