2023 (4) TMI 74 - AT - Income Tax

Addition u/s 68 - unexplained cash credit - Unexplained share application money received - HELD THAT - Except for raising allegations in the thin air the department had failed to lead any iota of evidence which would persuade us to conclude that it was the unaccounted money of the assessee company which was routed back to its coffers in the garb of share application money through the investor company. Onus cast upon the assessee company for proving the nature and source of the share application money a/w the additional burden cast upon it as per the first proviso to section 68 stands duly discharged. Accordingly, not being able to persuade ourselves to subscribe to the view taken by the lower authorities who had dubbed the share application money received by the assessee company as an unexplained cash credit u/s.68 we herein set- aside the order of the CIT(Appeals) and vacate the said addition. Thus, the Ground of appeal No.1 raised by the assessee is allowed in terms of our aforesaid observations. Addition u/s. 56(2)(viib) - Issue of additional shares at premium while splitting the existing shares - AO assessed the excess amount of Rs.15/- per share so received by the assessee as its income u/s. 56(2)(viib) - HELD THAT - As the provisions of Sec. 56(2)(vii) were introduced as an antiabuse measure to prevent laundering of unaccounted money in the garb of gifts after abolition of Gift Tax Act, therefore, there is no justifiable reason to depart from the understanding that the said provisions were in the nature of counter evasion mechanism to prevent laundering of unaccounted money. What in effect transpires is that a share gets split (in the same proportion for all the shareholders). As observed by the Tribunal in its aforesaid order, such allotment of additional shares would be akin to changing a one thousand rupee note for two five hundreds rupee notes. Accordingly, as stated by the Ld. AR, and, rightly so, the provisions of section 56(2)(viib) of the Act in the backdrop of the facts of the case before us could not have been triggered. Though the aforesaid issue was specifically raised by the assesee before the CIT(Appeals) however, the latter had failed to adjudicate the same. In all fairness, instead of restoring the issue to the file of the CIT(Appeals) for fresh adjudication which would only add to the pending litigation, we have taken a call and adjudicated the aforesaid issue - vacate the disallowance made by the A.O u/s. 56(2)(viib) - Thus, the Ground of appeal No.2 raised in appeal by the assessee is allowed.

Summary

Issues Involved:
1. Addition of Rs.34,49,600/- under Section 68 of the Income Tax Act, 1961.
2. Addition of Rs.75,000/- under Section 56(2)(viib) of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition of Rs.34,49,600/- under Section 68 of the Income Tax Act, 1961:

The assessee company, incorporated in 2009 but not yet operational, filed its income return for AY 2015-16, declaring an income of Rs.19,570/-. During scrutiny, the Assessing Officer (A.O) observed that the company received share application money amounting to Rs.34,49,600/- from M/s. Aayush Steelco Pvt. Ltd., a Kolkata-based company. The A.O requested supporting documents to verify the investor's creditworthiness. Despite receiving a reply from the investor, the A.O found it unsatisfactory and directed the assessee to produce the investor's directors, which the assessee failed to do. Consequently, the A.O treated the share application money as unexplained cash credit under Section 68, citing the assessee's failure to substantiate the source of funds.

Upon appeal, the CIT(Appeals) initially found the identity and source of the investor's funds satisfactory but later contradicted this by questioning the investor's creditworthiness, especially due to non-appearance of directors and alleged connections with a known entry operator. The CIT(Appeals) upheld the A.O's addition.

The Tribunal found that the investment by M/s. Aayush Steelco Pvt. Ltd. was sourced from its capital account with M/s. Sri Balaji Iron & Steel Traders, Vishakhapatnam, and was adequately substantiated with documentary evidence, including bank statements. The Tribunal also noted that the lower authorities erred in drawing adverse inferences based on the investor's shareholder being a shell company, as the investment was made from the investor's legitimate capital account. The Tribunal concluded that the onus to prove the nature and source of the share application money was duly discharged by the assessee and set aside the addition of Rs.34,49,600/- under Section 68.

2. Addition of Rs.75,000/- under Section 56(2)(viib) of the Income Tax Act, 1961:

The A.O observed that the assessee allotted 5000 shares at a premium of Rs.90 per share, while the fair market value (FMV) was Rs.85 per share, resulting in an excess of Rs.15 per share. Consequently, an addition of Rs.75,000/- was made under Section 56(2)(viib).

The CIT(Appeals) failed to adjudicate this specific ground raised by the assessee. The Tribunal, however, found that the additional shares were allotted on a pro-rata basis to existing shareholders, maintaining their shareholding percentage. Citing precedents from the ITAT, Mumbai, and the CBDT Circular No.10 of 2018, the Tribunal noted that such pro-rata allotment does not trigger Section 56(2)(viib) as it does not result in any disproportionate allotment or increase in wealth.

The Tribunal vacated the addition of Rs.75,000/- under Section 56(2)(viib), concluding that the provisions were not applicable in this context.

Conclusion:

The Tribunal allowed the appeal, setting aside the additions made under Sections 68 and 56(2)(viib) of the Income Tax Act, 1961. The detailed analysis and documentary evidence provided by the assessee sufficiently discharged the onus of proving the nature and source of the share application money, and the pro-rata allotment of shares did not warrant the application of Section 56(2)(viib).