Share application money cannot be considered as undisclosed income if identity of the share applicants is available

The Hon’ble Delhi High Court on 12.8.15 in the cases of Commissioner of Income Tax – 9 (Appellant) vs. Vrindavan Farms (P) Ltd. (Respondent) being ITA 71/2015 and in Commissioner of Income Tax – 9 (Appellant) vs. Vrindavan Farms (P) Ltd.(Respondent) being ITA 72/2015 and in that of Commissioner of Income Tax – 9 (Appellant) vs. Vrindavan Farms (P) Ltd. (Respondent) being ITA 84/2015 passed a judgment holding that share application money cannot be considered as undisclosed income if identity of the share applicants is actually available to the Assessing Officer.

Whether Share Application Money is undisclosed Income- where identity of shareholders is known- Pleaders engaged in the case:

Ms. Suruchi Aggarwal, Senior Standing Counsel along with Ms. Lakshmi Gurung, Junior Standing Counsel and Mr. Ved Jain appeared on behalf of the appellants and Mr. Pranjal Srivastava, Advocates appeared on behalf of the respondents in the cases.

Facts and circumstances of the case:

The appeals were filed by the Revenue against the common order dated 6.6.2014 passed by the Income Tax Appellate Tribunal in ITA Nos.3359, 3360 & 3361/Del/2013 for the Assessment Years 2006-07, 2007-08 and 2008-09 respectively.

Issue involved- if Share Application Money is undisclosed Income if Identity of payers is available:

The common issue of law that was raised by the Revenue was whether the ITAT was justified in upholding the order of deleting the addition made by the Assessing Officer amounting to Rs.4, 94, 50,000/- contributed towards share application money to the income of the Assessee under the provisions of Section 68 of the Income Tax Act, 1961.

The said issue required consideration of whether the Assessee had discharged the onus of proving the identity and other details of the share applicants and the authenticity of the transactions.

Arguments made:

Ms. Suruchi Aggarwal, learned Senior Standing counsel for the Appellant, relied on the judgment of the Delhi High Court in CIT v. Nova Promoters & Finlease Ltd., 342 ITR 169.

It was contended by the Ld. Advocate that the Assessing Officer was not required to state the source from which the assessee received the money. On the contrary, it was the Assessee who was in fact liable to give an explanation as to the source of the funds.

The ITAT in its impugned order noticed that in the instant case the Revenue did not doubt the identity of the share applicants. The ground to doubt their creditworthiness was the low income of the assessee which was actually reflected in their Returns.

However the full details of the share applicants including their PAN numbers, bank statements, balance sheets, profit and loss accounts, certificates relating to incorporation etc. were stated to the Assessing Officer by the Assessee.
It was observed by the ITAT that the Assessing Officer did not undertake any investigation of the above documents filed before him.

It has been righty held by the ITAT that the Assessing Officer completed the assessment merely on the presumption that low return was enough ground to doubt the credit worthiness of the share holders.

The judgment:

The Hon’ble Delhi High Court was of the view that the Assessee produced sufficient documents to discharge its onus of showing the genuineness of the share applicants. The Assessing Officer should have investigated before concluding the issue of creditworthiness.

It was observed that no addition can be made in the hands of the Assessee under the provisions of Section 68 of the Act. The Revenue was at liberty to move against the share applicants according to law.

In view of the facts and circumstances of the appeals, the Hon’ble Delhi High Court held that no substantial question of law arose. As such the appeals were dismissed.

Related Read- Assessment of Undisclosed Income u/s 133A