Opinion Of Eminent Legal Luminaries On Controversial Issues

Cash credits .Receipt of Share Application Money

QUERY: Assessee-company had received share application money from various companies by cheque. AO recorded statement of directors of such companies which had applied for shares of the assessee company. Such statements were recorded behind the back of the assessee and in spite of categorical request for cross examination of such directors; no such cross examination was granted. Finally, such statements were used against the assessee and addition was made u/s. 68 in respect of such share application. Whether statements of directors of concerned companies recorded behind the back of the assessee can be taken as evidence against the assessee without allowing the sufficient opportunity of cross-examination to the assessee? What are the consequences of breach of principles of natural justice? Whether self-serving statements of such directors obviate documentary evidence available on record.
ANSWER: No. The Supreme Court in Lovely Exports Ltd. [216 CTR 195] held that when share application money received from the shareholders whose name and PA Nos. are on record then the Assessing Officer is free to proceed to reopen the assessment of the shareholders and no addition should be made in the hands of the company. Similar observation you would find in CIT v. Steller Investment Ltd. [251 ITR 263 (SC)].

So, on the basis of above Supreme Court Judgments and without supplying the statements of directors who have subscribed the shares of the assessee company, no addition could be made in the hands of the company, who has received application money.

However, the Supreme Court recently in ex-parte order in Pr. CIT v. NRA Iron & Steel Pvt. Ltd. [412 ITR 161] has held that:-
i) The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors and credit worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the Assessing Officer, so as to discharge the primary onus;
ii) The Assessing Officer is duty bound to investigate the credit worthiness of the creditor or subscriber, verify the identity of the subscriber and ascertain whether the transaction is genuine or these are bogus entries of name lenders;
iii) If the enquiries and investigation reveal the identity of creditors to be dubious or doubtful, or lack credit worthiness, then the genuineness of the transaction would not be established.
In such a case, the assessee would not have discharge the primary onus, contemplated by section 68 of the Act.

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