Section 68 – Share Application Money & Unsecured loan from family members of directors – Unexplained cash credits

The Assessing Officer, having found certain share capital money and unsecured loan in the books of account of the assessee-company directed the assessee to explain the share capital money as well as unsecured loan. In response to the Assessing Officer’s query, the assessee submitted confirmation and disclosed that share capital and unsecured loan had been taken from the family members of the directors. The Assessing Officer, having noted that the alleged confirmation did not contain the necessary details, issued notice u/s. 133(6) to all those persons who had allegedly contributed to the share capital of the assesseecompany as well as given unsecured loan. In response to the notice, no one gave any reply. The Assessing Officer also procured information u/s. 131 from the bankers and compared the transaction from information gathered from bank but could not co-relate them. He then issued notice to the assessee, but the assessee never appeared before the Assessing Officer. The Assessing Officer, therefore, treated the share capital money and unsecured loan as unexplained cash credit falling u/s. 68 and, accordingly, made addition to the income of the assessee. The ITAT Mumbai and Hon’ble Bombay High Court confirmed the order of A.O.

The Hon’ble Supreme Court allowed the SLP filed by the assessee following the Supreme Court in case of CIT vs. Lovely Exports (P) Ltd. (2008) 216 CTR 195 / (2008) 6 DTR 308 held that, if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the A.O., then the department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as undisclosed income of the assessee company.