While upholding the ITAT order, a division bench of Bombay High Court held that, Share application money cannot be treated as Undisclosed Income.
The assessee company M/s. Likproof India P. Ltd is a sister concern of one Hindustan Hotels Limited, Goa (HHL). The assessee and HHL have common Directors. HHL had undertaken a hotel project and entered into a construction contract with the assessee. In 1995 HHL abandoned the hotel project. The building which was still under construction was then sold to one Peerless Finance in April/May 1995 for a consideration of Rs.11 crores.
Meanwhile it transpires that the assessee was in need of finance and had planned to increase its share capital and had approached HHL to contribute. HHL paid to the assessee a sum of Rs.1 crore vide two cheques. The first cheque for Rs.50 lakhs was dated 23rd June, 1995 and the second cheque also for Rs.50 lakhs was dated 31st March, 1996. HHL had disclosed the sum of Rs.1 crore as “share application money”. The assessee had also treated the aforesaid sum as share application money at the material time which became evident from a resolution recorded in the Minutes Book and which was seized during a search operation was carried out at the assessee’s office premises and the residence of the Managing Director on 27th March, 1996.
The division bench comprising of Justice M.S Sanklecha and Justice A.K. Menon observed that, In our view the statements recorded of the Managing Director of the company are not reliable. We find that the consideration by the Tribunal of the records was appropriate. The conclusion drawn by the Assessing Officer that the amount received was compensation and amount which was undisclosed income of the assessee cannot be sustained since the treatment of the receipts in the books of account of the company should prevail being maintained in the usual course of business. There is nothing on record to establish the contrary and beyond reasonable doubt. Equally there is nothing on record to establish that the entries made in the books of account cannot be relied upon. It is pertinent to mention that the Revenue had not brought on record any material indicating that the amount received by the assessee was by way of compensation. On the other hand, the employees of the assessee were cross examined in respect of the entries made in the pay-in-slips and this cross examination had revealed that narrations in the pay-in-slips accompanying the two cheques of Rs.50 lakhs each were made by them on their own without any directions or instructions from the assessee”.
While dismissing the Income Tax reference filed by The Commissioner of Income Tax Bombay City-I, the bench also observed that, “Considering the overall picture we are of the view that the order of the Tribunal cannot be faulted. However, we are in agreement with the view taken by the Tribunal to the effect that the entry made in the pay-in-slips cannot prevail over the entry in the books of account since the books of account would reflect the appropriate record wherein treatment of receipts would be found. In the circumstances, we have no hesitation coming to our conclusion and as a result we find that the Tribunal was justified in holding that the amount of Rs.1 crore cannot be assessed as undisclosed income”.
Read the full text of the Judgment below.
