2023 (12) TMI 1438 - AT - Income Tax

Addition u/s 68 - undisclosed income in the form of share capital and share premium - unexplained cash credit - HELD THAT - We notice that all the 14 shareholder are body corporates and annual returns have been regularly filed on the Ministry of Corporate Affairs portal. All the share applicant companies are regularly assessed to tax and even passed through scrutiny proceedings also. From perusal of the financial statements of the share subscribing companies we notice that they had sufficient share capital and accumulated Reserves and surplus which are sufficient enough to cover up the share application money invested by them in the equity of the assessee company. We are inclined to hold that the assessee has successfully explained the nature and source of alleged sum and even the source of source has been proved by providing details of the funds received from other sources through banking channel which has subsequently been used to make investment in the equity capital of the assessee company. D/R has merely given a general statement that these companies are paper/shell companies but no concrete evidence is filed on record which could prove the substance in such submissions failing which the issue in hand can be decided only on the basis of documentary evidence available on record and which clearly states that the assessee has explained the nature and source of the alleged sum thereby proving the identity and creditworthiness of the share subscribers and genuineness of the transactions. We find that the assessee has successfully discharged the burden of proof primarily casted upon it to explain the identity and creditworthiness of all the fourteen share applicants and genuineness of the share transactions and correctness of such details has not been disputed by the Revenue Authorities except making general observations. Therefore considering the evidences placed by Ld. A/R to explain the nature and source of the alleged share application money we find no reason to interfere with the findings of the ld. CIT(A) deleting the addition made u/s 68 of the Act. Addition made towards unexplained expenditure in the form of commission allegedly paid to brokers for arranging the accommodation entries - CIT(A) deleted the said addition on the ground that the additions made u/s 68 of the Act has been deleted - HELD THAT - While adjudicating the Ground Nos. 1 to 3 raised by the revenue we have dealt with the facts of the case and have confirmed the findings of the ld. CIT(A) deleting the additions made u/s 68 of the Act. Since we have held that the cash credit received by the assessee were genuine then there remains no basis for making addition for unexplained expenditure towards arranging the alleged credits. Findings of the ld. CIT(A) is confirmed. Assessee appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal arising under the Income Tax Act, 1961, for Assessment Year 2011-12, relate primarily to the validity of additions made by the Assessing Officer (AO) under section 68 and section 69C of the Act. The key issues are:

1. Whether the addition of Rs. 33,19,33,000/- made by the AO as unexplained income under section 68 on account of share capital and share premium received from 14 private limited companies is justified.

2. Whether additions of Rs. 3,00,000/- and Rs. 29,00,000/- treated as unexplained cash credits by the AO are justified.

3. Whether the addition of Rs. 16,75,665/- made as unexplained expenditure towards commission paid to brokers for arranging accommodation entries is justified.

4. Whether the assessee discharged the onus cast upon it under section 68 to prove the identity, creditworthiness of the share applicants, and genuineness of the transactions.

5. The applicability of judicial precedents, including the Supreme Court decision in PCIT vs. NRA Iron & Steel (P) Ltd., and the correct interpretation of the burden of proof under section 68.

Issue-wise Detailed Analysis

Issue 1: Addition of Rs. 33,19,33,000/- as unexplained share capital and share premium under section 68

Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. The assessee must prove the identity and creditworthiness of the person from whom the money is received and the genuineness of the transaction. The Supreme Court in PCIT vs. NRA Iron & Steel (P) Ltd. clarified that once the assessee furnishes documents relating to identity, genuineness, and creditworthiness, the AO must conduct independent inquiry before making additions. The proviso to section 68 requiring explanation of "source of source" was introduced only from 01.04.2013, thus not applicable for AY 2011-12.

Court's Interpretation and Reasoning: The Tribunal examined the detailed documentary evidence submitted by the assessee, including PAN cards, share application forms, allotment advices, audited financial statements, income tax returns, bank statements, and replies to summons issued under section 131. The AO's initial objections included non-appearance of directors of share applicants and suspicion that the share applicants were shell companies providing accommodation entries.

However, during remand proceedings, the AO himself admitted that the majority of the directors of the share applicant companies appeared before him, produced documents, and were examined. The physical existence of the share applicant companies was verified by a departmental inspector. The AO accepted the genuineness of the share capital but expressed doubts only about the high share premium paid.

The Tribunal noted that creditworthiness must be judged on net worth and investible funds, not merely on net profits or income in a single year. The share applicants demonstrated sufficient net worth, and the proportion of investment relative to net worth was reasonable. The Tribunal relied on several judicial precedents affirming that low profits alone cannot discredit creditworthiness.

The AO failed to establish any concrete evidence to rebut the assessee's explanation or to link the fund trail to unaccounted money. The AO's suspicions about the nature of share applicants' offices and presence of only one employee were found to be uncorroborated and irrelevant to the genuineness of transactions.

The Tribunal also rejected the AO's reliance on the NRA Iron & Steel case as factually distinguishable since the AO in this case conducted thorough inquiries and accepted the share capital as genuine.

Application of Law to Facts: The assessee discharged the initial burden under section 68 by producing voluminous documentary evidence and facilitating examination of share applicant directors. The burden shifted to the AO to disprove the genuineness or creditworthiness, which the AO failed to do on a sound basis.

Treatment of Competing Arguments: The AO's argument that the share applicants were shell companies was unsupported by concrete evidence. The Tribunal emphasized that mere suspicion or inability to serve summons initially does not justify addition if the assessee produces credible evidence later. The Tribunal also rejected the AO's objection based on non-appearance of all directors at initial stages, recognizing practical difficulties due to elapsed time.

Conclusion: The addition of Rs. 33,19,33,000/- as unexplained share capital and share premium was rightly deleted by the CIT(A) and upheld by the Tribunal.

Issue 2 and 3: Additions of Rs. 3,00,000/- and Rs. 29,00,000/- as unexplained cash credits

Legal Framework and Precedents: Section 68 also applies to unexplained cash credits. The assessee must explain the nature and source of such credits. Judicial precedents establish that if the amounts represent sale proceeds of shares purchased in earlier years and accepted as genuine, the sale consideration cannot be treated as unexplained income.

Court's Interpretation and Reasoning: The AO treated these amounts as unexplained cash credits based on the inability to serve summons on the payers and suspicion of rotation of funds. The assessee explained that these amounts were received from sale of shares of Torrent Commercial Pvt. Ltd., which had been legitimately acquired in earlier years and accepted as genuine investments.

The assessee produced share sale invoices, bank statements, allotment advices, share certificates, Form 2 (Return of Allotment), Form 20B (Annual Return), and annual returns of Torrent Commercial Pvt. Ltd., which were accepted by the AO in remand. The AO did not raise any substantive objection to these documents.

The Tribunal relied on judicial decisions holding that if the purchase of shares was accepted by the department, the subsequent sale proceeds cannot be treated as bogus or unexplained income. The AO's failure to challenge the genuineness of share purchases precluded additions on sale proceeds.

Application of Law to Facts: The assessee satisfactorily explained the nature and source of these credits as legitimate sale proceeds of shares held as investments. The AO's reliance on non-service of summons and suspicion was insufficient to justify additions.

Treatment of Competing Arguments: The AO's suspicion of rotation of funds and shell companies was rejected due to lack of corroborative evidence and acceptance of documentary proof by the AO himself.

Conclusion: The additions of Rs. 3,00,000/- and Rs. 29,00,000/- as unexplained cash credits were rightly deleted.

Issue 4: Addition of Rs. 16,75,665/- as unexplained expenditure towards commission paid to brokers

Court's Interpretation and Reasoning: Since the additions under section 68 relating to share capital and cash credits were deleted, the addition for unexplained expenditure on commission paid for arranging accommodation entries stood on a weak footing. The CIT(A) deleted this addition accordingly.

Conclusion: The deletion of this addition was upheld as there was no basis to treat the expenditure as unexplained once the underlying transactions were held genuine.

Issue 5: Burden of Proof and Applicability of Judicial Precedents

The Tribunal extensively discussed the burden of proof under section 68, emphasizing that the assessee's initial burden is to prove the identity, creditworthiness, and genuineness of the transactions. Once discharged, the burden shifts to the AO to disprove the same with cogent evidence.

The Tribunal relied on authoritative decisions including the Supreme Court in PCIT vs. NRA Iron & Steel (P) Ltd., various High Court rulings, and coordinate bench decisions of the Tribunal, which consistently hold that mere suspicion or non-appearance of directors initially cannot justify additions if the assessee produces credible documentary evidence and facilitates examination of investors.

The Tribunal also clarified that amendments to section 68 and insertion of provisos relating to "source of source" and section 56(2)(viib) were effective only from AY 2013-14 and hence not applicable to the present AY.

Significant Holdings

"The assessee has discharged the initial burden cast upon it by virtue of Section 68 of the Act by furnishing voluminous documentary evidence relating to the identity, creditworthiness of the share applicants and genuineness of the transactions. The burden shifted to the Assessing Officer who failed to bring on record any cogent evidence or reasoning to disbelieve the same."

"The creditworthiness of a company cannot be gauged merely from its net profits or income in a particular year but must be judged on the basis of its net worth and availability of investible funds."

"Mere suspicion or non-service of summons initially cannot justify additions if the assessee produces credible documentary evidence and facilitates examination of the investors."

"Additions under section 68 cannot be made on sale proceeds of shares if the purchase of such shares was accepted as genuine and not challenged by the department."

"The proviso to section 68 and section 56(2)(viib) were introduced with effect from 01.04.2013 and are not applicable to AY 2011-12."

"The AO's reliance on the Supreme Court decision in PCIT vs. NRA Iron & Steel (P) Ltd. is misplaced as the facts of the present case are distinguishable, particularly since the AO conducted thorough inquiries and accepted the share capital as genuine."

"The addition of Rs. 33,19,33,000/- as unexplained share capital and share premium, Rs. 3,00,000/- and Rs. 29,00,000/- as unexplained cash credits, and Rs. 16,75,665/- as unexplained expenditure were rightly deleted by the CIT(A) and the same are upheld."