2013 (7) TMI 453 - HC - Income Tax

Unexplained investment - NRI company made share subscription to the capital of respondent - A.O. directed addition of the amount of share subscription to assessee s income due to doubt ob crediworthiness of subscriber company - Tribunal deleted the addition - Held that - It is not the case of any of the parties that subscriber is a bogus company or a non-existent company and the amount which was subscribed by the said Company by way of share subscription was in fact the money of the respondent assessee - assessee had established the identity of investor who had provided the share subscription and it was established that the transaction was genuine though as per contention of the respondent the creditworthiness of the creditor was also established. If assessee Company having received subscriptions and furnished complete details of the shareholders no addition could be made under section 68 in the absence of any positive material or evidence to indicate that the shareholders were benamidars or fictitious persons or that any part of the share capital represented company s own income from undisclosed sources - Following decisions of Commissioner of Income Tax vs. Lovely Exports (P) Ltd 2008 (1) TMI 575 - SUPREME COURT OF INDIA and Commissioner of Income Tax vs. Divine Leasing Finance Ltd. 2006 (11) TMI 121 - DELHI HIGH COURT - Decided against Revenue.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in these appeals were:

(i) Whether the Income Tax Appellate Tribunal (ITAT) was justified in deleting the addition made under section 68 of the Income Tax Act, despite the assessee failing to prove the financial capacity of the non-resident Indian (NRI) company that had contributed share capital, and where the genuineness of the transaction was not beyond doubt;

(ii) Whether the ITAT was justified in declining to entertain and deal with additional grounds urged by the Revenue, even though such grounds were germane to the lis;

These questions were framed repeatedly across the appeals, with slight variations, but essentially focused on the validity of additions made on account of unexplained share capital credited by a foreign NRI company and the scope of the ITAT's jurisdiction in dealing with additional grounds raised by the Revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Validity of addition under section 68 on account of share capital contributed by an NRI company

Relevant legal framework and precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. If the assessee fails to satisfactorily explain the source of such credits, the amount can be added to income as undisclosed income. The burden lies on the assessee to prove the identity and genuineness of the creditor as well as the transaction. However, the Supreme Court in Commissioner of Income Tax vs. Lovely Exports (P) Ltd. clarified that if the identity of the shareholder is established, the Department cannot treat the share application money as undisclosed income merely on suspicion of the creditworthiness of the shareholder. The Department may proceed against the shareholder individually if the shareholder is bogus or fictitious, but the company receiving the share capital cannot be penalized under section 68 without further proof.

Other High Court decisions cited include Divine Leasing & Finance Ltd., Bhav Shakti Steel Mines (P) Ltd., Amines Plasticizers Ltd., G.M. Mittal Stainless Steel Ltd., and Ruby Traders & Exporters Ltd., which generally upheld the principle that unexplained credits must be established as such by cogent evidence and that mere doubts about creditworthiness without disproving identity and genuineness are insufficient.

Court's interpretation and reasoning: The Assessing Officer (AO) had made additions amounting to Rs. 21,27,50,403/- on the ground that the creditworthiness of M/s Alliance Industries Limited, Sharjah (an NRI company) was not proved despite the assessee furnishing details of the transaction and identity. The AO held that the transaction through banking channels did not ipso facto prove financial capacity, and the RBI permission did not establish financial capacity either. The AO relied on the precedent of CIT vs. Ruby Traders and Exporters Ltd. to justify treating the amount as unexplained credit.

The Commissioner of Income Tax (Appeals) reversed the AO's findings, holding that the identity of the foreign investor was established beyond doubt and that the amounts had flowed through proper banking channels from the NRI company. The CIT(A) found that the creditworthiness of the company was also established, relying on prior years' assessments where similar investments from the same company were accepted as genuine. The CIT(A) further relied on decisions such as Godavari Corporation Ltd., H.A. Saha & Co., and CIT vs. Hindustan Motors to hold that similar cash credits accepted in earlier years ought to be accepted in subsequent years unless there was a material change in facts.

The ITAT affirmed the CIT(A)'s order, thereby deleting the addition.

Key evidence and findings: The assessee had furnished details of the NRI company's identity, mode of transfer of funds through banking channels, and RBI permission. The AO accepted the identity and genuineness of the transactions but doubted the financial capacity. The CIT(A) and ITAT found no evidence to disprove creditworthiness and noted acceptance of similar transactions in earlier years.

Application of law to facts: The Court observed that the identity of the investor was not disputed, nor was it claimed that the company was bogus or non-existent. The Supreme Court's ruling in Lovely Exports (P) Ltd. was held to be directly applicable, which precludes treating share application money as undisclosed income if the identity is established. The Court held that the burden on the assessee is to establish identity and genuineness; creditworthiness is not a determinative factor once identity is proved. The Department's remedy lies in pursuing the shareholder individually if the shareholder is bogus.

Treatment of competing arguments: The Revenue argued that the AO's reasons for addition were cogent and should not have been reversed. They relied on precedents predating Lovely Exports and emphasized the failure to prove financial capacity. The assessee and respondent relied on Lovely Exports and subsequent High Court decisions, emphasizing that identity and genuineness were established and that the AO had accepted similar transactions in earlier years.

The Court favored the latter view, noting the binding nature of the Apex Court's decision and the lack of any dispute regarding the identity or existence of the NRI company.

Conclusions: The Court concluded that the additions under section 68 were not sustainable. The identity of the investor being established, the amounts received by way of share capital could not be treated as unexplained credit or undisclosed income. The Revenue's appeals on this issue were dismissed.

Issue (ii): Jurisdiction of the ITAT to entertain additional grounds urged by the Revenue

Relevant legal framework: The ITAT's jurisdiction to entertain additional grounds raised by the Revenue in appeals is governed by procedural rules and principles of natural justice. Grounds germane to the lis may be entertained if raised in time and properly substantiated.

Court's interpretation and reasoning: The Court noted that the ITAT declined to entertain additional grounds urged by the Revenue, though these were germane to the lis. The Court did not elaborate extensively on this issue, as the main controversy centered on the addition under section 68.

Application of law to facts: Since the main substantive issue was decided against the Revenue on merits, the Court found no reason to interfere with the ITAT's exercise of discretion in not extending the scope to additional grounds.

Conclusions: The Court upheld the ITAT's decision not to entertain additional grounds urged by the Revenue.

3. SIGNIFICANT HOLDINGS

"If the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment." (Lovely Exports (P) Ltd.)

"Since all the ingredients as are required to be satisfied for accepting the deposit as genuine u/s 68 are fulfilled in respect of this investment... Assessing Officer was not justified in drawing adverse inference in respect of this amount under reference."

"Similar cash credit having been accepted as genuine in the earlier year, the same explanation ought to have been accepted in the subsequent year." (Godavari Corporation Ltd.)

The Court established the principle that once the identity of a shareholder is established and the transaction is genuine, the burden to prove creditworthiness is not determinative for additions under section 68. The Department's remedy lies in pursuing the shareholder individually if the shareholder is bogus or fictitious. Mere suspicion or doubt about creditworthiness without disproving identity and genuineness does not justify addition.

Accordingly, the Court dismissed the Revenue's appeals, upheld the deletion of additions under section 68, and affirmed the ITAT's refusal to entertain additional grounds.

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