2025 (5) TMI 105 - AT - Income Tax

Addition u/s 68 - bogus LTCG - unexplained share capital and share premium received by the assessee from various private limited companies - whether the AO has discharged the burden shifted to his shoulders in this case? - HELD THAT - As assessee has discharged the burden placed on its shoulders by providing all the documents required in order to prove the identity of the creditor credit worthiness of the creditor and genuineness of transactions. On the contrary the AO has not discharged the burden shifted to his shoulders by disproving those documents. Instead he has taken adverse view on the basis of incomplete enquiry incorrect appreciation of financial statements of four companies and based on the general allegations made in the report of the investigation report. Accordingly addition made by the AO u/s 68 was not justified. Accordingly we set aside the order passed by CIT(A) and direct the AO to delete the addition made u/s 68 of the Act. Appeal filed by the assessee is allowed.

Summary

The core legal questions considered in this judgment pertain to the applicability and interpretation of section 68 of the Income Tax Act, specifically:

1. Whether the addition of Rs. 116.50 crores as unexplained cash credit under section 68 on account of share capital and share premium received by the assessee from various private limited companies is justified.

2. Whether the assessee discharged the initial burden of proving the identity, genuineness of transactions, and creditworthiness of the share subscribers as required under section 68.

3. Whether the Assessing Officer (AO) fulfilled the burden of disproving the assessee's claim by conducting adequate and proper inquiry into the source and nature of the cash credits.

4. The legal validity of relying on investigation reports and statements of alleged accommodation entry providers without independent verification or inquiry by the AO.

5. The effect of non-appearance or non-response of the share subscribers to notices issued under the Act on the genuineness of the transactions.

6. The applicability of amendments to section 68 introduced from Assessment Year 2013-14 onwards to the Assessment Year 2012-13 under consideration.

Issue-wise Detailed Analysis:

1. Legality of addition under section 68 for unexplained cash credits:

The legal framework under section 68 mandates that when an assessee credits an amount as cash credit, the assessee must prove three essential elements: the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the creditor. If the assessee discharges this initial burden, the onus shifts to the AO to disprove the claim with cogent evidence.

Precedents such as CIT vs. Value Capital Services (P) Ltd and CIT vs. Dwarkadhish Investment (P) Ltd emphasize that mere inability to trace the creditors or non-response to notices does not justify additions under section 68 if the assessee has furnished sufficient documentary evidence to establish the three ingredients.

In this case, the AO examined only four out of 35 subscriber companies in detail, finding common directors, auditors, cross-holdings, losses, and inability to serve notices. For 18 Kolkata-based subscribers, the AO relied on a report from the Investigation Wing stating these companies were not traceable at the given addresses. No detailed inquiry was conducted for the remaining 13 companies. Despite this, the AO made a blanket addition treating the entire Rs. 116.50 crores as unexplained cash credit.

The Tribunal noted that such a generalized conclusion without adequate inquiry into all subscribers is legally unsustainable. The AO's reliance on incomplete investigation and hearsay reports, without independent verification or cross-examination, was contrary to the statutory burden and judicial precedents.

2. Discharge of burden by the assessee:

The assessee furnished extensive documentary evidence for all 35 subscribers, including PAN numbers, certificates of incorporation, balance sheets, income tax returns, board resolutions, share application forms, allotment letters, and bank statements showing payment of share capital and premium. These documents collectively established the identity, genuineness, and creditworthiness of the subscribers.

The Tribunal emphasized that creditworthiness does not require the subscribers to have only own funds; borrowed funds are also acceptable. The net worth of the subscriber companies was sufficient relative to their investments in the assessee.

Thus, the assessee fulfilled the requirements under section 68, shifting the burden to the AO to disprove the genuineness of the transactions.

3. Adequacy of AO's inquiry and burden of disproving:

The AO's inquiry was limited and largely based on the investigation wing's report and statements of alleged accommodation entry providers, which were not subjected to cross-examination. The AO did not utilize statutory powers effectively to summon or verify the subscribers and did not conduct any detailed financial or source verification of the subscribers' ability to invest.

The Tribunal referred to the Supreme Court decision in CIT vs. Orissa Corporation Pvt Ltd, which held that when the assessee has furnished names, addresses, and PAN details of creditors who are income tax assessees, the Revenue must pursue the matter further to disprove their creditworthiness. Failure to do so means the assessee has discharged its burden.

Further, the Tribunal relied on decisions of the Bombay High Court and coordinate benches that additions under section 68 cannot be sustained merely on the basis of non-appearance of creditors or untraceability if the assessee has produced adequate documentary evidence.

4. Reliance on investigation reports and statements of alleged accommodation entry providers:

The Tribunal held that the AO cannot rely solely on investigation reports or statements of alleged accommodation entry providers without conducting independent inquiry. It is impermissible to base additions on such reports without verifying their veracity or allowing the assessee to cross-examine the persons making such statements.

Precedents cited include decisions where courts have struck down additions based on uncorroborated statements or incomplete inquiries, emphasizing the need for proper adjudicatory process.

5. Effect of non-response or non-appearance of share subscribers:

The Tribunal noted that non-response to notices under section 133(6) or non-appearance before the AO does not automatically lead to the conclusion that the transactions are bogus or unexplained cash credits. The assessee's production of documentary evidence shifts the burden to the Revenue to disprove the claim.

Case law supports that mere inability to serve notices or locate subscribers at given addresses is insufficient to treat share capital and premium as unexplained cash credits.

6. Applicability of amendments to section 68:

The amendments to section 68 by Finance Act 2012, effective from Assessment Year 2013-14, introduced a proviso requiring the assessee to prove the source of funds of the creditor as well. The Tribunal clarified that these amendments are not applicable retrospectively to AY 2012-13 under consideration.

Thus, the AO could not invoke the amended provisions to justify the addition. The pre-amended section 68 requires only proof of identity, genuineness, and creditworthiness, which the assessee had furnished.

Significant Holdings:

"From the specific observations as pointed out above, it is evident that the sudden spurt in the Balance Sheet of the company by way of monies received under the garb of 'share capital', 'share premium' & 'share application money' is nothing but the money earned by the assessee from undisclosed sources kept away from the incidence of tax and was now round tripped and brought into the books by way of adopting this circuitous method of share capital through fictitious investors." - This was the AO's reasoning, which the Tribunal rejected for lack of sufficient inquiry and evidence.

"In this case the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees... The Revenue did not examine the source of income of the said alleged creditors to find out whether they were credit-worthy or were such who could advance the alleged loans... In those circumstances, the assessee could not do any further. In the premises, if the Tribunal came to the conclusion that the assessee had discharged the burden that lay on him then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence." - Supreme Court precedent applied by the Tribunal.

"The addition made by the Assessing Officer under section 68 of the Act, in the facts and circumstances of the case, was not justified." - Tribunal's final conclusion.

The Tribunal established the core principles that for additions under section 68, the assessee must prove identity, genuineness, and creditworthiness, and if done, the burden shifts to the Revenue to disprove. Mere non-traceability or non-response does not justify additions. Reliance on investigation reports without independent inquiry is impermissible. Amendments to section 68 are not retrospective.

Accordingly, the Tribunal set aside the addition of Rs. 116.50 crores as unexplained cash credit under section 68 and directed deletion of the addition, allowing the appeal filed by the assessee.