Opinion Of Eminent Legal Luminaries On Controversial Issues

Cash credits – Share application money – Violation of principles of Natural Justice

QUERY: When a closely held company receives share application money with premium in A.Ys. 2009-10, 2010-11 & 2011-12, he files Form 2, confirmation, address, PAN, bank account details etc during the course of assessment. AO doubts the capacity of share applicants and adds back u/s. 68 based on statement recorded of accommodation entry provider to share applicants. Assessee company asked for a copy of statement recorded and cross examination of entry provider, which was not provided by the AO. Please also refer proviso to section 68. Is the assessment valid.
ANSWER: Assessment is not valid, as it violates the principles of natural justice. The Supreme Court in R. B. Shreeram Durga Prasad v. Settlement Commission [176 ITR 169] has held that the order made in violation of principles of natural justice is void and nullify.
The Supreme Court in CIT v. Lovely Exports (P) Ltd. [216 ITR 195] has held that if share application money is received by the assessee company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of the assessee–company.
Provisos to section 68 was inserted by the Finance Act, 2012 w.e.f. April 1, 2013 i.e. from assessment year 2013-14 and therefore the provisos are not applicable to earlier assessment years.
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