2022 (8) TMI 1571 - AT - Income Tax

Revision u/s 263 - Addition u/s 68 - bogus share capital and share premium money received by the assessee-company - HELD THAT - We observe that non-compliance of notice by the share applicants in the second round of assessment proceedings cannot be used to draw adverse inference against the assessee as the Revenue was having all the necessary evidences/documents which were filed by the share applicants in the first round of assessment in response to the notices issued u/s 133(6) of the Act. On the issue of share applicants they are not having any business activity and their net worth was also very meagre. We note that the share application was received through Banking channel out of own funds of investing companies as is clear from the audited annual accounts and that it is not necessary that source of investment is to be out of taxable income. On the third issue that summons issued u/s 131 to the erstwhile and present Directors returned un-served except Mr. Rakesh Kumar Choubey who was erstwhile Director and appeared to comply with the summons. We note that according to the AO he was not assessed to tax and he was not having any PAN and he was working as a Peon to M/s. Khaitan Associates. We note that the observations of AO are not correct as Shri Rakesh Kumar Choubey is holding PAN and also assessed to tax and filing his return of income under the charge of ITO Ward-37(1) Kolkata. We also note from the reasons before us that the statement given u/s 131 was retracted just after two days recording. We note that in the first round of assessment the transactions were examined and verified completely and accepted by the AO then what new facts have come on record prompting the ld. AO to take a contrary view. AO has not recorded any finding as to how the share capital/share premium received by the assessee were bogus and unexplained or his own money was converted in the form of share capital/share premium. Thus no adverse material/evidences were brought on record and documents already on record remained uncontroverted. AO cannot be allowed to disturb the satisfaction recorded by the first ld. AO in the first round based upon evidences available on record that too just on the surmises and conjectures. Thus we are inclined to set aside the order of ld. CIT(Appeals) and direct the ld. Assessing Officer to delete the addition. Decided in favour of assessee.

Summary

The core legal questions considered in this judgment are as follows:

(1) Whether the addition of Rs. 7,86,50,000/- made under section 68 of the Income Tax Act, 1961, on account of share capital and share premium money received by the assessee-company, was justified.

(2) Whether the jurisdiction exercised by the Principal Commissioner of Income Tax (Pr. CIT) under section 263 of the Act in setting aside the original assessment order was valid and whether the subsequent reassessment proceedings were lawful.

(3) Whether the reopening of assessment under section 147 of the Act was validly confined to the issue of escapement of income related to Data Processing Charges or whether the scope could be expanded to include share capital and share premium issues.

(4) Whether the Assessing Officer complied with the directions issued by the Pr. CIT under section 263 regarding conducting independent and detailed inquiries into the share capital and share premium subscriptions.

(5) Whether the assessee discharged its onus under section 68 by establishing the identity, genuineness, and creditworthiness of the share applicants and the source of funds.

(6) Whether the issue of share capital at a premium could be questioned by the Revenue in the absence of any statutory bar or specific provision applicable for the assessment year under consideration.

Issue-wise Detailed Analysis:

1. Validity of Addition under Section 68:

The legal framework under section 68 requires that when any sum is credited in the books of an assessee, the assessee must explain the nature and source of such credit to the satisfaction of the Assessing Officer (AO). The explanation must establish three ingredients: (a) identity of the share applicants, (b) genuineness of the transaction, and (c) creditworthiness of the share applicants.

Precedents from various High Courts and the Supreme Court clarify that once the assessee establishes these elements satisfactorily by furnishing documents such as PAN details, bank statements, audited accounts, affidavits, and confirmations, the burden shifts to the Revenue to disprove the genuineness of the transactions.

In this case, the assessee had furnished comprehensive details including bank statements, PAN numbers, addresses, share application forms, and Form No. 2 filed with the Registrar of Companies. The AO in the original assessment proceedings accepted these evidences and held the investments as genuine.

However, in the reassessment proceedings following the revisionary order under section 263, the AO made the addition under section 68 on the ground that the assessee failed to discharge its onus. The AO relied on the non-compliance of notices by some share applicants and the statement of one erstwhile director, who was later shown to be a dummy director and whose statement was retracted.

The Tribunal noted that the AO did not conduct any fresh investigation or summon the directors of the subscriber companies as directed by the Pr. CIT. The AO's conclusion was based on surmises and conjectures without analyzing the voluminous material already on record, which had been accepted in the original assessment.

Therefore, the addition under section 68 was held to be unjustified as the assessee had satisfactorily discharged its burden, and the AO failed to follow due process in the reassessment.

2. Jurisdiction and Validity of Revisionary Order under Section 263:

The assessee raised additional grounds challenging the jurisdiction of the Pr. CIT to pass the revisionary order under section 263. However, the Tribunal observed that the assessee did not challenge the section 263 order before the Tribunal, and thus it attained finality.

The Tribunal emphasized that the Pr. CIT had set aside the original assessment order on the ground that the AO had failed to make complete and full enquiries into the subscription to share capital and share premium. The Pr. CIT directed the AO to conduct detailed investigations including summoning directors under section 131 and tracing the source of share capital through various layers.

The Tribunal declined to entertain the challenge to the jurisdiction of the Pr. CIT at this stage since it was not raised in a timely manner and the order had become final.

3. Scope of Reopening under Section 147:

The reopening was initially triggered by escapement of income related to Data Processing Charges. The Tribunal noted that the AO expanded the scope of assessment to include share capital and share premium issues invoking Explanation 3 to section 147, which applies retrospectively from 1st April 1989.

The Tribunal did not find fault with the expansion of scope as Explanation 3 to section 147 empowers reopening where share capital or share premium is found to be bogus or unexplained credit.

4. Compliance with Directions of Pr. CIT under Section 263:

The Pr. CIT had issued detailed directions for the AO to conduct independent and complete inquiries, including issuing summons under section 131 to directors of subscriber companies, sending information to AOs having jurisdiction over subscriber companies, and verifying the source of share capital.

The Tribunal found that the AO did not comply with these directions effectively. Summons under section 131 were issued only to directors of the assessee company, not to directors of subscriber companies. Most summons were returned unserved, and the AO relied heavily on the statement of one erstwhile director, which was later retracted and found to be incorrect.

The AO failed to conduct independent inquiries as mandated and ignored the detailed evidences and documents already on record from the original assessment.

5. Onus on the Assessee and Burden of Proof:

The Tribunal reiterated the settled legal position that the initial burden lies on the assessee to prove identity, genuineness, and creditworthiness. Once this is done, the burden shifts to the Revenue to disprove.

In this case, the assessee had furnished all requisite details, including PAN, bank statements, audited accounts, and confirmations. The Revenue had the power and means to verify these details but did not pursue the matter effectively, especially in the reassessment proceedings.

Non-compliance by some share applicants to notices under section 133(6) in the reassessment proceedings was not sufficient to draw adverse inferences, especially when the same details were furnished and accepted in the original assessment.

The Tribunal also noted that the assessee is not required to prove the "source of source" of funds.

6. Issue of Share Capital at Premium:

The Tribunal held that the issue of shares at a premium is a commercial decision and is the prerogative of the Board of Directors. There is no statutory bar or requirement to justify the premium amount for the assessment year under consideration.

The Tribunal relied on authoritative decisions holding that share premium is a capital receipt and not income, and the Revenue cannot question the premium charged without a specific provision. The amendment under section 56(viib) dealing with premium over fair market value was applicable only from assessment year 2013-14 onwards and hence not relevant for the year under consideration.

Treatment of Competing Arguments and Evidence:

The Revenue argued that the share applicants did not respond to notices and that the directors summoned under section 131 did not cooperate, suggesting the transactions were bogus.

The Tribunal rejected this, noting that the AO failed to follow directions to summon directors of subscriber companies and to conduct independent inquiries. The statement of the erstwhile director was retracted and contradicted by evidence of his PAN and tax assessments.

The Tribunal also observed that the AO's findings were largely narrative and non-analytical, lacking clear reasons or findings to justify the addition.

Conclusions:

The Tribunal concluded that the addition under section 68 was not sustainable as the assessee had discharged its burden and the AO failed to conduct proper inquiries as directed by the Pr. CIT.

The jurisdictional challenge to the revisionary order under section 263 was not entertained due to non-challenge before the Tribunal.

The reassessment order was set aside, and the addition deleted.

Significant Holdings:

"Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the officer, satisfactory the sum so credited may be charged to income tax as the income of the assessee of that previous year." (Section 68 of the Income Tax Act)

"The share capital and share premium are basically irreversible receipts or credits in the hands of the companies... It is the prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium."

"The assessee has successfully established the identity of the companies who have purchased shares at a premium. The assessee has also filed bank details to explain the source of the shareholders and the genuineness of the transaction was also established by filing copies of share application forms and Form No. 2 filed with the Registrar of Companies."

"Non-compliance of notice by the share applicants in the second round of assessment proceedings cannot be used to draw adverse inference against the assessee as the Revenue was having all the necessary evidences/documents which were filed by the share applicants in the first round of assessment in response to the notices issued under section 133(6) of the Act."

"There is no legal obligation on the assessee to produce some Director or other representative of the applicant companies before the AO. Therefore failure on part of the assessee to produce the Directors of the share applicant companies could not by itself have justified the additions made by the AO."

"The Assessing Officer should pass speaking order after providing reasonable opportunity to the assessee and verifying the source of share capital including the share premium of all the subscribers and rotation of money through various hands so as to ascertain the true nature of transaction which will bring to the fore, the reality of the transactions." (Directions of Pr. CIT under section 263)

"The addition was made simply for the reason that ld. Pr. CIT has exercised his jurisdiction under section 263 of the Act setting aside the original assessment. The ld. Assessing Officer has ignored the facts, documents, confirmations and evidences, which were available on record on the assessment folder."

Final determination: The appeal was allowed by setting aside the addition of Rs. 7,86,50,000/- made under section 68, deleting the addition and restoring the position as per the original assessment order.