S. 68 (share capital): (i) It is a fallacy to assume that a company which has not commenced business has unaccounted money, (ii) Fact that investors have a common address is not relevant, (iii) Fact that shares were subsequently sold at reduced rate is not relevant

There is a basic fallacy in the submission of the Revenue about the precise role of the Assessee, Five Vision. The broad sweeping allegation made is that “the Assessee being a developer is charging on money which is taken in cash”. This, however, does not apply to the Assessee which appears to be involved in the construction of a shopping mall. In fact for the AYs in question, the Assessee had not commenced any business. The construction of the mall was not yet complete during the AYs in question. The profit and loss account of the Assessee for all the three AYs, which has been placed on record, shows that only revenue received was interest on the deposits with the bank. Assessee is, therefore, right in the contention that the basic presumption of the Revenue as far as the Assessee is concerned has no legs to stand. Correspondingly, the further allegation that such ‘on money’ was routed back to the mainstream in the form of capital has also to fail.

(ii) The other submission that the Assessee was itself being used as a conduit for routing the ‘on money’ or that the investment in the Assessee was also for routing such ‘on money’ has not even prima facie been able to be established by the Revenue. On the one hand there is an attempt to treat the cash credit found in the Assessee’s books of accounts to be ‘undisclosed income of the Assessee’ by showing the investors to be ‘paper companies’. On the other hand, the attempt is to show that this money in fact belongs to certain other entities whose source has not been explained by the Assessee.

(iii) Coming to the core issue concerning the identity, creditworthiness and genuineness of the investor companies, it is seen that as far as the Table I investors were concerned, only 9 were searched and in their cases, the ITAT on a very detailed examination was satisfied that they not only existed, but that the Assessee had discharged the primary onus of proving their creditworthiness and genuineness. They had responded to the summons issued to them. Directors of 14 of these companies appeared before the AO and produced their books of accounts.

(iv) The mere fact that some of the investors have a common address is not a valid basis to doubt their identity or genuineness.

(v) Also, the fact that the shares of the Assessee were subsequently sold at a reduced price is indeed not germane to the question of the genuineness of the investment in the share capital of the Assessee. The question of avoidance of tax thereby may have to be examined in the hands of the person purchasing the shares.

(M/s. Nova Promoters and Finlease (P) Ltd. 342 ITR 169 (Del), CIT v. Winstral-Petrochemicals Pvt. Ltd. 330 ITR 603 (Del), CIT v. Lovely Exports (P) Ltd. 216 CTR 195 (SC), CIT v. Divine Leasing and Finance Ltd. (decision dated 21st January 2008 of the Supreme Court in Special Leave to Appeal (Civil) (CC) 375 of 2008) and decision dated 17th September 2012 of the Supreme Court in CIT v. Kamdhenu Steel & Alloys Limited [SLP (Civil) CC 15640 of 2012)], CIT v. Divine Leasing and Finance Ltd. 299 ITR 268, CIT v. Sophia Finance Ltd. (1994)205 ITR 98 (FB) (Del) referred).