The main legal point established in the judgment is the treatment of unexplained share application money as unexplained income of the assessee under Section 68 of the Income Tax Act.

Chitra Venkataraman, J.

1. The following are the substantial questions of law raised in this Tax Case Appeal filed by the assessee:

(i) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in law in holding that a part of share capital is the income of the appellant on the alleged ground that the shareholders are not genuine?

(ii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the share capital can be termed as "unexplained investment" by the appellant?

(iii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in treating the share capital as income of the appellant even though no business was commenced by the appellant?

2. The assessment herein is a block assessment for the block period 24.2.1988 to 24.2.1998. It is seen from the narration in the orders of the authorities below that on 25.2.1997, there was a search in the premises of the assessee by the Enforcement Directorate, during which time, the Enforcement Directorate seized certain books and documents relating to the assessee. They were thereafter handed over to the Department and warrant under Section 132A was issued. On the recovery of materials, notice under Section 158BC was issued to the assessee to furnish the return of income. The assessee filed a nil return along with a letter questioning the issue of notice when there was no search carried out in the premises of the assessee. The assessee further submitted that the company had not commenced any business, and as the return had to be filed before 10.5.1998, it filed a nil return that there was no undisclosed income to be assessed at the hands of the assessee.

3. It is seen from the facts that the company had acquired a property at No.6, Santhome High Road, Chennai, at a cost of Rs.2.5 crores. The sources were stated to be mainly out of the share capital received locally as well as from NRI and OCB. The assessee was requested to furnish the total amount received towards share capital and the details of share application money pending for allotment. The assessee filed the details as regards the names of shareholders and the amount contributed and the mode. On a perusal of the balance sheet for the year ending 31.3.1995, 31.3.1996 and 31.3.1997, it was ascertained that the total subscribed capital was to the tune of Rs.2,34,22,720/-. Apart from that, a further sum of Rs.47,79,480/-, which was the share application money, was pending allotment as on 31.3.1997. Summons were issued under Section 131 of the Income Tax Act and enquiry was conducted as regards those applicants who were stated to be from Jaipur, Bangalore, Thanjavur, Coimbatore and Chennai. The enquiries conducted at Jaipur revealed that most of them said that they had not applied to the assessee for share allotment. Those persons who were assessed to tax, had also filed proof, indicating that they had not subscribed to the shares at all. The assessee was confronted with this enquiry result, indicating the state of affairs.

4. Pursuant to the notice, the Directors Mr.Pannalal Jain, Mr.V.N.Chandrasekaran and Mr.Ramasamy, appeared before the Officer and filed a sworn statement. When confronted with the statements made that they were benami investments, Mr.Pannalal denied the allegation. However, on a perusal of the share transfer register, it was found that the shares were transferred to Mr.Pannalal. The Officer viewed that the share application money was made only through cash and the payment made to the individuals were also by way of cash. Thus the claim of Mr.Pannalal was rejected.

5. The Officer pointed out that the assessee had not filed any objection to the proposed addition made. Referring to the decision of the Full Bench of the Delhi High Court reported in [1994] 205 ITR 98 (Commissioner of Income Tax Vs. M/s.Sofia Finance Ltd.), the Assessing Officer held that