The Tax Publishers2013 TaxPub(DT) 0047 (Ind-Trib) : (2012) 139 ITD 0264 : (2013) 153 TTJ 0341 : (2013) 084 DTR 0130

INCOME TAX ACT, 1961

--Income from undisclosed sources--Addition under section 68Genuineness of share transactions--In the scrutiny assessment order, the assessing officer observed that on a perusal of balance sheet of the assessee company, it was seen that assessee had shown share capital and reserve and surplus. In addition to above, assessee had also shown unsecured loans. This is the first year of the business of the assessee. The whole share application money was received during the year and shares were allotted. Query was raised in respect to share application money, reserve and surplus and unsecured loans. Assessee in its reply filed copy of accounts of shareholders and confirmation letters of loans. In further reply assessee submitted details of share application money. The assessing officer found from the reply chart that assessee has allotted shares to the other share holders on a premium of Rs. 90 on the face value of shares @ Rs. 10 each and thereby created a reserve and surplus of Rs. 25,20,000 in the very first year of its incorporation. It is pertinent to mention here that in the very first year how could the assessee manage such share application on a premium of Rs. 90 without doing any business or without creating goodwill. Neither company earned any profit in previous years nor distributed any dividend. There was no value of the share of the company except face value. During the assessment proceedings, statement of one of the directors S. Mehta was recorded on 30-10-2009. He was specifically asked, as to how share money was received and how could he contact the shareholders either personally or through any broker. He explained that whole money was received through cheque of ABN A Bank Branch, Kolkata and these parties were known to him in the past and this share money has been managed without the help of any broker. He further stated that still he is in touch with these shareholders and these companies are engaged in the business of investment. He was further asked how and on what basis value of the share was determined at Rs. 100 as against Rs. 10 of face value. He was also required to explain the method adopted for valuation of share in absence of any business done and how the cost of Rs. 100 per share was determined. It was stated that this calculation is not based on any method of valuation, but based on record of his business experience of last 30 years. He is promoter and director of the company and on this basis, price of shares has been fixed at Rs. 100. In the next question regarding issue of shares on a premium of Rs. 90 to others and purchase of shares by promoters at the face value, he explained that both directors and promoters have purchased these shares on face value. It was also revealed that there happened no meeting of the share holders with the directors. It was further explained that he met J the Director of B. J & Company and G the Director of M/s. U Pvt. Ltd., in a marriage party at Bombay where the negotiation regarding application for shares were made. But how he met the persons of Ujjain, who applied for shares, is not in his memory. It is worth mentioning here that during assessment proceedings on enquiry the assessing officer found that so-called shareholders of Ujjain were provided funds, for purchase of shares that too on premium, by associate concerns of the promoters of this company only. After this, information under section 133(6) vide letter dated 16-11-2009 was called for by the assessing officer for counter verification of the allotment of shares on premium from the concerned parties. The notices were sent through speed post which were returned by postal authorities 'left'. Again a notice under section 142(1) was issued to the assessee and this fact was communicated to the assessee and assessee was again allowed an opportunity to provide the correct and latest addresses of the above shareholders. Assessee has given latest addresses of the shareholders vide its letters dated 7-12-2009 and 9-12-2009 which were also returned back. Thereafter, the assessing officer along with M, Inspector, visited Kolkata on 17-12-2009 (an authorization to this effect was duly taken from Additional Commissioner and made inquiries on given present addresses of the certain so-called shareholders. The assessing officer also visited bankers of this companies namely ABN Bank, Kolkata and obtained copies of bank statements of both companies and these accounts were further investigated from the angle of sources of fund arrived in the Bank account of both companies. The copies of accounts of the source of fund companies were also obtained which show that cash was deposited in the associated companies and then cheques were issued in the name of alleged companies (Shareholders of assessee company) and they immediately issued cheques in favour of assessee-company as share application money. In view of the above, please show cause, in absence of identity of the creditors/share holders and creditworthiness is not proved, why the so-called amounts of share application money may not be treated as unexplained cash creditors as per provisions of section 68. After considering the assessee's reply, the assessing officer was not satisfied with regard to the identity, genuineness and creditworthiness of the shareholders, therefore, added entire amount under section 68. The Commissioner (Appeals) confirmed the addition. Held: There was no genuine transaction of share capital, the companies were not existed at all. The detailed findings recorded by the assessing officer and Commissioner (Appeals) could not be controverted by the Authorized Representative by bringing any positive material on record. Accordingly, the action of lower authorities for applying provisions of section 68 in respect of share capital received from Kolkata based company as well as individual investors from Ujjain is confirmed. The letters were issued by the assessing officer under section 136 to the Ujjain based investors and it was found that all these letters were returned by the Postal Authorities with the remarks 'Left'. All these findings clearly establish that no genuine investors existed, their identity remained unverified by the department. Accordingly, there is no reason to interfere in the findings recorded by the lower authorities, which are as per material on record.

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