|AO made addition u/s. 68 in respect of share application money received by the assessee in the very first year of its incorporation. Whether AO could have made such addition in spite of the fact that assessee had practically done no business so as to generate any such income? What proof is required for proving the genuineness of the transaction? What shall be the scenario where share application money is received from tainted entities? What is the effect of finding that promoters / directors of assessee-company later on acquired the very shares at discounted rates from such share holders?
|Yes, AO has right to make addition of share application money received by the assessee in very first year of incorporation, irrespective of the fact, whether the assessee has done business or not, on the basis of proviso inserted by the Finance Act, 2012 w.e.f. April 1, 2013 i.e., assessment year 2013-14.
The said proviso reads as under:
“Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee- company shall be deemed to be not satisfactory, unless –
(a) The person, being a resident in whose name such credit is recorded in the books of such company also offer an explanation about the nature and source of such sum so credited; and
(b) Such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.
In the case of a company the following are the propositions of law under section 68. The assessee has to prima facie prove:
i) The identity of the creditors / subscriber;
ii) The genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels;
iii) The credit worthiness of financial strength of the creditor / subscriber;
iv) If relevant details of the assessee or PAN identity of the creditor / subscriber are furnished to the Department along with the copies of shareholders’ register, share application forms, share transfer register etc.; it would constitute acceptable proof or acceptable explanation by the assessee.
v) Therefore Department would not be justified in drawing an adverse inference only because the creditor / subscriber is tainted.
vi) Later on, when promoters / directors acquired the share at discounted rate from such shareholder / subscriber, then, the acquirers have to prove the value and genuineness of the transaction.
|CA. H. N. Motiwalla
|Cash credits- Share application money
Opinion Of Eminent Legal Luminaries On Controversial Issues
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