2019 (2) TMI 1773 - AT - Income Tax

Unexplained cash credit u/s.68 - Unexplained share capital and share premium - HELD THAT - Out of 11 share applicants, six share applicants had duly responded to the notices issued u/s.133(6) of the Act totalling to ₹ 1,43,00,000/-. AO did not proceed to make further enquiries with regard to these six share applicants. He merely disbelieved the various documentary evidences submitted before him with regard to these six share applicants without any basis. With regard to the remaining five share applicants totalling to ₹ 84,50,000/-, no replies were received u/s.133(6) of the Act, but the details about the shareholders in the form of name, address of the share holders, ITR acknowledgements, copies of share application form, return of allotment filed with the Registrar of the companies, their confirmations, balance sheets and their bank statements were indeed filed by the assessee before the Ld. AO. No deficiencies were found in the said documentary evidences filed by the assessee in order to draw any adverse inference thereon. Admittedly all the 11 share applicants had sufficient net worth in the form of share capital and reserves and surplus to make investment in the share company which duly proved their creditworthiness. All the transactions were routed through regular banking channels which prove the genuineness of the transactions also. All the share applicants are duly assessed to Income Tax which is quite evident from the copy of income tax return acknowledgement filed before the Ld. AO thereby proving their identity. Also developer i.e., M/s. Nigo s Properties Ltd., had expressed their willingness to purchase from the company, the rights to further develop the property for its business purposes. Hence, we find that the assessee company had tried to capitalize on the possession of leasehold rights for a period of 99 years which could be commercially exploited by way of development for industrial purposes and accordingly, had entered into agreement with M/s. Nigo s Properties Ltd., and for such commercial exploitation the assessee had factored that future act into account for the purpose of justification of share premium from various share applicants. - Decided in favour of assessee.

Summary

Issues Involved:

1. Justification of addition made under Section 68 of the Income Tax Act, 1961 towards share capital and share premium.
2. Examination of the veracity of receipt of share capital and share premium by the assessee.
3. Compliance with the three necessary ingredients of Section 68: identity of shareholder, creditworthiness of shareholder, and genuineness of the transaction.
4. Applicability of the proviso to Section 68 introduced by the Finance Act 2012.
5. Evaluation of the financial worth of share applicants and the justification for share premium.

Issue-Wise Detailed Analysis:

1. Justification of Addition Made Under Section 68:

The primary issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the addition of ?2,27,50,000/- made under Section 68 of the Income Tax Act, 1961. The Assessing Officer (AO) had treated the amounts received from share applicants as unexplained cash credits due to insufficient evidence of the nature and source of the credits.

2. Examination of Veracity of Receipt of Share Capital and Share Premium:

The assessee, a private limited company, issued shares at a premium and received ?2,27,50,000/- from 11 share applicants. Notices under Section 133(6) were issued to all applicants, with six parties responding and five failing to respond or notices being unserved. The AO treated the amounts from non-responding parties as unexplained cash credits and questioned the justification of the share premium received.

3. Compliance with Section 68 Requirements:

The assessee submitted various documents, including share applications, bank statements, balance sheets, PAN, ITR acknowledgements, and confirmations from share applicants. The AO, however, questioned the substantial worth of the assessee to receive such premiums and treated the entire amount as unexplained cash credit. The CIT(A) found that the assessee had satisfactorily proved the identity, creditworthiness, and genuineness of the transactions, fulfilling the requirements of Section 68.

4. Applicability of Proviso to Section 68:

The proviso to Section 68, introduced by the Finance Act 2012, applies prospectively from AY 2013-14. The CIT(A) and Tribunal held that this proviso was not applicable for AY 2012-13, the relevant year under consideration. The Tribunal cited the Bombay High Court's decision in CIT vs. Gagandeep Infrastructure Pvt. Ltd., which confirmed the prospective application of the proviso.

5. Evaluation of Financial Worth and Justification for Share Premium:

The AO questioned the financial activities and credibility of the share applicants, noting irregularities in their financial statements. The assessee argued that financial reserves are not solely indicative of a company's worth and that the share premium was justified based on future prospects and profitability from development rights. The Tribunal found that the share applicants had sufficient net worth and the transactions were genuine, routed through regular banking channels, and the identity of the applicants was established.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to delete the addition made under Section 68, finding that the assessee had satisfactorily proven the identity, creditworthiness, and genuineness of the share applicants. The Tribunal also confirmed that the proviso to Section 68 was not applicable for the relevant assessment year. Consequently, the appeal of the revenue was dismissed.