My company received share application money. Can the Assessing Officer use section 68 on it at all, or is share capital simply a capital receipt he cannot touch?
He can. The Delhi High Court, sitting as a Full Bench, held that section 68 is widely worded - it covers any sum found credited in the books, whatever colour the assessee gives it - so the officer has jurisdiction, and indeed a duty, to enquire whether the alleged shareholders actually exist. If they are identified and shown to have invested, the money is a capital receipt and nothing more happens. If they do not exist, there is no valid issue of share capital, because shares cannot be issued to non-existent persons, and the credit may be charged as the company's income.
Decided by the High Court (Delhi High Court, Full Bench (the reference was made to a larger Bench because the correctness of CIT v Stellar Investment Ltd was doubted); judgment by B.N. Kirpal J) on 1993-08-27, reported as [1994] 205 ITR 98 (Delhi); ILR 1994 Delhi 212; 1993 (27) DRJ 385; I (1994) BC 499. It bears on section 68, section 263, section 256(2) of the Income Tax Act 1961, in Cash Credits & Unexplained Money and Revision & Rectification matters.
This is the decision that put section 68 back into share capital cases in Delhi. A Division Bench in CIT v Stellar Investment Ltd had said that even assuming the subscribers were not genuine, the share capital could under no circumstances be treated as the company's undisclosed income. Section 68 had not been cited in that case. Sophia Finance confines Stellar to its correct scope - once shareholders are identified and shown to have paid, the receipt is capital - and holds that the officer is not shut out from asking the prior question. It is also the source of the standard formulation that the enquiry starts with existence of the shareholder, and that the officer may in a fit case go on to ask whether an identified depositor is a mere name-lender. The Court deliberately left the onus question open, which is why the fights that followed were about burden rather than jurisdiction.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Sophia Finance Ltd was incorporated on 27 April 1983 and dealt in stocks and financing. For assessment year 1985-86 it returned a net income of Rs 12,433, made up of a loss of Rs 94,030 on the sale of shares bought for Rs 5,42,708, interest of Rs 1,30,321 and Rs 15,348 from commission and bill discounting. The return was accepted and the assessment completed on 11 June 1986. The order recorded a declared paid up capital of Rs 20 lakhs and that details and confirmations were on record. The Commissioner issued a notice under section 263, and held the assessment erroneous and prejudicial to the Revenue for lack of enquiry, relying on Gee Vee Enterprises v Addl CIT: the officer should have enquired into the genuineness of the shareholders, since in many similar cases the shareholders had turned out not to exist at the addresses given or to be name-lenders. The Tribunal set that order aside, holding the officer had made such enquiry as he could, noting the list of shareholders holding more than 1,000 shares, addresses, allotment letters and share issue expenses on record, and following its own decision in Standard Cylinders that a company cannot be asked for the shareholders' own sources. It then refused a reference under section 256(1). The Revenue applied under section 256(2).
The Court directed the Tribunal to state a case and refer a reframed question, with no order as to costs. On the law, section 68 applies to any sum found credited in the books of the assessee, irrespective of the nomenclature or source the assessee puts on it, and that includes share application money. The officer has jurisdiction, and it is his duty, to enquire whether the alleged shareholders in fact exist. If they exist, possibly no further enquiry is needed and the receipt is capital. If they do not exist, there is in effect no valid issue of share capital, because shares cannot be issued in the name of non-existing persons, and the words may be charged in section 68 give the officer jurisdiction to treat the credit as the assessee's income of that previous year. The observations in Stellar Investment Ltd are correct so far as they go - where shareholders are identified and have invested, the receipt is capital - but they cannot mean that the officer may not go into whether the shareholders existed, and section 68 was not referred to in that case. On the procedural point, the real controversy was whether the Commissioner was right that no enquiry had been made, and the Court could reframe the question to bring that out. The Court expressly declined to decide on whom the onus lies and when it is discharged.
The Court read section 68 as a codification of the pre-1961 position on cash credits, its one addition being that the sum is taxed in the previous year in which the entry appears. The operative words are any sum found credited in the books, and the Court treated that width as decisive: whatever colour the assessee gives a receipt, the officer may ask its nature and source, and the enquiry ordinarily proceeds by asking first whether the person said to have paid actually existed, and then, depending on the facts, whether an identified depositor is a mere name-lender. A capital receipt cannot be taxed, but it is for the officer to be satisfied that the receipt is truly capital; the company's own characterisation does not conclude the matter, and section 68 empowers him to go behind it. From that the Court drew the specific proposition about shares: shares cannot be issued in the name of non-existent persons, so if the alleged shareholders do not exist there has been no valid issue of share capital, and what is left is an unexplained credit. That is how Stellar Investment was reconciled rather than overruled. On the reference question, the Court applied CIT v Biju Patnaik, where the Supreme Court held a question of law arose when the Tribunal had not considered identity and creditworthiness or the material about benami holders, and S.P. Gramophone Co and Electric Construction and Equipment Co on the power to reframe a question so that it reflects the real issue between the parties. Since the section 263 order rested solely on absence of enquiry, and the Tribunal had not addressed that finding, whether action under section 263 was validly taken was a question of law fit for reference.
The Income-tax Officer would be entitled to enquire, and it would indeed be his duty to do so, whether the alleged shareholders do in fact exist or not.
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Handle my notice → Ask a CA on WhatsAppHe can. The Delhi High Court, sitting as a Full Bench, held that section 68 is widely worded - it covers any sum found credited in the books, whatever colour the assessee gives it - so the officer has jurisdiction, and indeed a duty, to enquire whether the alleged shareholders actually exist. If they are identified and shown to have invested, the money is a capital receipt and nothing more happens. If they do not exist, there is no valid issue of share capital, because shares cannot be issued to non-existent persons, and the credit may be charged as the company's income. This was decided by the High Court (Delhi High Court, Full Bench (the reference was made to a larger Bench because the correctness of CIT v Stellar Investment Ltd was doubted); judgment by B.N. Kirpal J) and bears on section 68, section 263, section 256(2) of the Income Tax Act 1961. It is reported as [1994] 205 ITR 98 (Delhi); ILR 1994 Delhi 212; 1993 (27) DRJ 385; I (1994) BC 499. This is the decision that put section 68 back into share capital cases in Delhi. A Division Bench in CIT v Stellar Investment Ltd had said that even assuming the subscribers were not genuine, the share capital could under no circumstances be treated as the company's undisclosed income. Section 68 had not been cited in that case. Sophia Finance confines Stellar to its correct scope - once shareholders are identified and shown to have paid, the receipt is capital - and holds that the officer is not shut out from asking the prior question. It is also the source of the standard formulation that the enquiry starts with existence of the shareholder, and that the officer may in a fit case go on to ask whether an identified depositor is a mere name-lender. The Court deliberately left the onus question open, which is why the fights that followed were about burden rather than jurisdiction. If it applies to you, the first step is this: Assemble the shareholder file at the time of allotment, not at assessment: names, full addresses, PAN, allotment letters, bank details and confirmations, because the first question the officer is entitled to ask is whether these people exist.
Sophia Finance Ltd was incorporated on 27 April 1983 and dealt in stocks and financing. For assessment year 1985-86 it returned a net income of Rs 12,433, made up of a loss of Rs 94,030 on the sale of shares bought for Rs 5,42,708, interest of Rs 1,30,321 and Rs 15,348 from commission and bill discounting. The return was accepted and the assessment completed on 11 June 1986. The order recorded a declared paid up capital of Rs 20 lakhs and that details and confirmations were on record. The Commissioner issued a notice under section 263, and held the assessment erroneous and prejudicial to the Revenue for lack of enquiry, relying on Gee Vee Enterprises v Addl CIT: the officer should have enquired into the genuineness of the shareholders, since in many similar cases the shareholders had turned out not to exist at the addresses given or to be name-lenders. The Tribunal set that order aside, holding the officer had made such enquiry as he could, noting the list of shareholders holding more than 1,000 shares, addresses, allotment letters and share issue expenses on record, and following its own decision in Standard Cylinders that a company cannot be asked for the shareholders' own sources. It then refused a reference under section 256(1). The Revenue applied under section 256(2). The matter was decided on 1993-08-27 by the High Court (Delhi High Court, Full Bench (the reference was made to a larger Bench because the correctness of CIT v Stellar Investment Ltd was doubted); judgment by B.N. Kirpal J). On those facts the High Court held as follows. The Court directed the Tribunal to state a case and refer a reframed question, with no order as to costs. On the law, section 68 applies to any sum found credited in the books of the assessee, irrespective of the nomenclature or source the assessee puts on it, and that includes share application money. The officer has jurisdiction, and it is his duty, to enquire whether the alleged shareholders in fact exist. If they exist, possibly no further enquiry is needed and the receipt is capital. If they do not exist, there is in effect no valid issue of share capital, because shares cannot be issued in the name of non-existing persons, and the words may be charged in section 68 give the officer jurisdiction to treat the credit as the assessee's income of that previous year. The observations in Stellar Investment Ltd are correct so far as they go - where shareholders are identified and have invested, the receipt is capital - but they cannot mean that the officer may not go into whether the shareholders existed, and section 68 was not referred to in that case. On the procedural point, the real controversy was whether the Commissioner was right that no enquiry had been made, and the Court could reframe the question to bring that out. The Court expressly declined to decide on whom the onus lies and when it is discharged.
The Court read section 68 as a codification of the pre-1961 position on cash credits, its one addition being that the sum is taxed in the previous year in which the entry appears. The operative words are any sum found credited in the books, and the Court treated that width as decisive: whatever colour the assessee gives a receipt, the officer may ask its nature and source, and the enquiry ordinarily proceeds by asking first whether the person said to have paid actually existed, and then, depending on the facts, whether an identified depositor is a mere name-lender. A capital receipt cannot be taxed, but it is for the officer to be satisfied that the receipt is truly capital; the company's own characterisation does not conclude the matter, and section 68 empowers him to go behind it. From that the Court drew the specific proposition about shares: shares cannot be issued in the name of non-existent persons, so if the alleged shareholders do not exist there has been no valid issue of share capital, and what is left is an unexplained credit. That is how Stellar Investment was reconciled rather than overruled. On the reference question, the Court applied CIT v Biju Patnaik, where the Supreme Court held a question of law arose when the Tribunal had not considered identity and creditworthiness or the material about benami holders, and S.P. Gramophone Co and Electric Construction and Equipment Co on the power to reframe a question so that it reflects the real issue between the parties. Since the section 263 order rested solely on absence of enquiry, and the Tribunal had not addressed that finding, whether action under section 263 was validly taken was a question of law fit for reference. In the words reproduced by the source cited on this page: "The Income-tax Officer would be entitled to enquire, and it would indeed be his duty to do so, whether the alleged shareholders do in fact exist or not."
It was decided by the High Court on 1993-08-27 and is reported as [1994] 205 ITR 98 (Delhi); ILR 1994 Delhi 212; 1993 (27) DRJ 385; I (1994) BC 499. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 68, section 263, section 256(2), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Court directed the Tribunal to state a case and refer a reframed question, with no order as to costs. On the law, section 68 applies to any sum found credited in the books of the assessee, irrespective of the nomenclature or source the assessee puts on it, and that includes share application money. The officer has jurisdiction, and it is his duty, to enquire whether the alleged shareholders in fact exist. If they exist, possibly no further enquiry is needed and the receipt is capital. If they do not exist, there is in effect no valid issue of share capital, because shares cannot be issued in the name of non-existing persons, and the words may be charged in section 68 give the officer jurisdiction to treat the credit as the assessee's income of that previous year. The observations in Stellar Investment Ltd are correct so far as they go - where shareholders are identified and have invested, the receipt is capital - but they cannot mean that the officer may not go into whether the shareholders existed, and section 68 was not referred to in that case. On the procedural point, the real controversy was whether the Commissioner was right that no enquiry had been made, and the Court could reframe the question to bring that out. The Court expressly declined to decide on whom the onus lies and when it is discharged. It arises in Cash Credits & Unexplained Money and Revision & Rectification matters, on section 68, section 263, section 256(2) of the Income Tax Act 1961, and was decided by Delhi High Court, Full Bench (the reference was made to a larger Bench because the correctness of CIT v Stellar Investment Ltd was doubted); judgment by B.N. Kirpal J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not argue that section 68 can never apply to share capital. That argument was rejected; argue instead that the identity is established and the explanation is satisfactory on the facts. If the assessment was completed without enquiry into the subscribers, expect a section 263 notice, and be ready to show what the officer actually examined rather than what was merely filed. Read the section 68 provisos inserted later, which changed what a closely held company must explain about its subscribers; this judgment is on the unamended section.
Still good law. A citedby search returns 370 later citing documents, 59 of them High Court or Supreme Court, and this Full Bench continues to supply the working test for s.68 on share capital. The Delhi High Court applied it in CIT-3 v Five Vision Promoters Pvt Ltd (27 November 2015): at para 29 the Bench set out that 'A Full Bench of this Court in CIT v. Sophia Finance Limited held in the context of Section 68 of the Act that: (i) The Assessee has to prima facie prove...', reproduced the identity, genuineness and creditworthiness test, and at paras 38-43 applied those criteria to the investor companies before dismissing the Revenue's appeals. The same Court worked from it in CIT-II v Kamdhenu Steel and Alloys Ltd (23 December 2011) and CIT v Illac Investment (P) Ltd (17 April 2006), and the Rajasthan High Court in CIT v First Point Finance Ltd (13 April 2005). Nothing overruling, doubting or confining it was found in either probe. Two things not to misread. In Alok Aggarwal v Joint CIT (Delhi, 14 February 2003) the words 'reliance by the assessing officer on the decision... was misplaced' are the assessee's representative's argument, not the Bench's view. And the judgment's relationship with Stellar Investment is one of explanation rather than conflict - the Full Bench explained and distinguished that line, and later benches have treated Sophia Finance as holding the field. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Until build 87 this library carried a second entry on the same judgment, at /caselaw/case/cit-v-sophia-finance-ltd-section-68-and-share-capital/, which asked: The Assessing Officer wants to treat our share application money as unexplained credit. Can section 68 be applied at all to money received as share capital? It was the shorter of the two write-ups and has been merged into this one. That address now redirects here, and every citation, section and subject it carried that this entry did not has been folded in. The batch line gives 1994, the year of the ITR report; the judgment was delivered on 27 August 1993 and this record follows the judgment. This is a decision on an application under section 256(2), so the Court only directed a reference; it did not decide whether Sophia Finance's share capital was genuine or whether the section 263 order should stand, and the outcome of the reference is not recorded here. The Court expressly refused to decide on whom the onus lies to show that a credit is share capital and when that onus is discharged - the very point most section 68 disputes now turn on. The harvested page names only Kirpal J in its bench line although the judgment records that the matter was referred to a Full Bench, so I cannot give the other judges' names. I did not check any later authority. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Court directed the Tribunal to state a case and refer a reframed question, with no order as to costs. On the law, section 68 applies to any sum found credited in the books of the assessee, irrespective of the nomenclature or source the assessee puts on it, and that includes share application money. The officer has jurisdiction, and it is his duty, to enquire whether the alleged shareholders in fact exist. If they exist, possibly no further enquiry is needed and the receipt is capital. If they do not exist, there is in effect no valid issue of share capital, because shares cannot be issued in the name of non-existing persons, and the words may be charged in section 68 give the officer jurisdiction to treat the credit as the assessee's income of that previous year. The observations in Stellar Investment Ltd are correct so far as they go - where shareholders are identified and have invested, the receipt is capital - but they cannot mean that the officer may not go into whether the shareholders existed, and section 68 was not referred to in that case. On the procedural point, the real controversy was whether the Commissioner was right that no enquiry had been made, and the Court could reframe the question to bring that out. The Court expressly declined to decide on whom the onus lies and when it is discharged.
TaxSphere, “CIT v Sophia Finance Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-sophia-finance-ltd-section-68-and-share-capital/ (validity last checked 2026-08-29)
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