2017 (6) TMI 1284 - AT - Income Tax

Addition u/s 68 - unexplained cash credit - assessee has not proved the genuineness and creditworthiness of the cash credits - scandalous transaction - circuitous route of round tripping - HELD THAT - The transactions undertaken by these groups of companies are scandalous. A number of companies have been floated and none of them have any business nor any asset worth mentioning. The first company issues a cheque to the second company for allotment of shares at a huge premium and the second company allots shares to the first company. The second company instead of encashing the cheque endorses this cheque to the third company as consideration of allotment of shares at a heavy premium in that company. The third company does not encash the cheque but in turn endorses this cheque to the fourth company towards consideration of allotment of shares at a huge premium by the fourth company. The fourth company in turn endorses this cheque to the first company as consideration for the allotment of shares at a huge premium by the first company to the fourth company. By this process the circuitous route of round tripping is completed. We come to understand the modus operandi is to sell these companies having huge share capital and investments to persons who have unaccounted money by transfer of the shares at a nominal amount. The shares in these companies are sold at a ridiculously low value and consequently the management and control of this company is transferred. The purchasers of shares of the companies thereafter show bogus sale of the investments held by such company to third parties through a chain of transactions by way of layering and bring in their unaccounted money into that company. Such practices have to be depreciated. In such cases the assessees cannot claim that the entire transactions are bogus transactions and hence the provisions of law will not apply and no addition can be made u/s 68. We dismiss this argument as devoid of merit. CIT(A) was wrong in concluding that Section 68 does not apply as the transaction is a fraudulent transaction and as it is a sham transaction. He was also in error in holding that the assessee has discharged the onus that lay on it. The genuineness of the transactions has not been proved by the assessee. We reverse these findings of the CIT(A). - Decided against assessee

Summary

Issues Involved:
1. Applicability of Section 68 of the Income Tax Act, 1961.
2. Genuineness and creditworthiness of the cash credits.
3. Validity of the transactions under the Negotiable Instruments Act and Companies Act.
4. Justification for the share premium charged.
5. Whether the transactions are sham or fictitious.

Issue-Wise Detailed Analysis:

1. Applicability of Section 68 of the Income Tax Act, 1961:
The Revenue argued that Section 68 applies as the assessee showed a credit in its books of account. The assessee contended that no actual money was received, only book entries were made. The Tribunal held that the receipt of cheques and their credit in the books of account satisfy the requirements of Section 68, which states, "Where any sum is found credited in the books of an assessee maintained for any previous year...". The Tribunal rejected the assessee's argument that endorsing cheques does not count as "sum found credited".

2. Genuineness and Creditworthiness of the Cash Credits:
The Assessing Officer (AO) concluded that the assessee failed to prove the genuineness and creditworthiness of the cash credits. The Tribunal agreed, noting that the companies involved had minimal financial activity and bank balances, making the high share premium unjustifiable. The Tribunal found the transactions lacked genuineness and the companies did not have the creditworthiness to justify the investments.

3. Validity of the Transactions under the Negotiable Instruments Act and Companies Act:
The assessee argued that the transactions were valid under the Negotiable Instruments Act and Companies Act, as cheques were legally endorsed and share capital was allotted. The Tribunal acknowledged the legal validity of the transactions but emphasized that this does not exempt the assessee from proving the genuineness and creditworthiness of the credits under Section 68.

4. Justification for the Share Premium Charged:
The Tribunal found the share premium of Rs. 990 on a Rs. 10 share to be exorbitant and unjustifiable. The assessee failed to provide any rationale or follow any recognized methods for determining the share premium. The Tribunal noted that the financial statements of the companies involved did not support such high valuations, indicating that the transactions were not genuine.

5. Whether the Transactions are Sham or Fictitious:
The AO described the transactions as fictitious book entries involving circular endorsements of cheques among four companies, with no actual movement of funds. The Tribunal concurred, noting that the transactions were meticulously planned to create an illusion of genuine investments. The Tribunal dismissed the assessee's argument that no addition should be made if the transactions are sham, stating that the credits recorded in the books of accounts were legally valid and not fictitious.

Conclusion:
The Tribunal upheld the AO's addition of Rs. 190 Crores as unexplained cash credits under Section 68, reversing the CIT(A)'s order. The Tribunal found that the assessee failed to prove the genuineness and creditworthiness of the transactions, and the high share premium was unjustifiable. The Tribunal emphasized that the legal validity of the transactions under the Negotiable Instruments Act and Companies Act does not exempt the assessee from the requirements of Section 68. The appeal of the Revenue was allowed.