2025 (5) TMI 628 - HC - Income Tax

Addition u/s 68 - bogus share capital premium - AO s remand report had categorically stated that the share applicant companies had no credit worthiness to invest in the assesse company - Tribunal upholding the action of the CIT (A) in deleting the addition - whether three factors which are required to be established by the department at the first instance have been established namely identity of the investors their creditworthiness and the genuineness of the transaction? HELD THAT - The assessee had inventories of Rs. 8.38 crores as on 31.03.2011 and 9.36 crores as on 31.03.2012. The audited result of the assessee has shown its profits grown by over three times between assessment years 2011-2012 and the assessment year 2012- 2013. Further during the same period the earning per share of the assessee company had grown from two and half times to 16% per share of Rs. 10 and therefore the CIT (A) on facts held that the assessee company was showing good returns and were showing good profits for its investors and it is a growing company. Therefore the submission of the revenue that the allegation that unduly high premium was charged was not examined by the CIT (A) is incorrect. In fact this aspect was also examined by the assessing officer to certain extent as pointed out by the CIT (A). When the matter travelled on appeal to the learned tribunal at the instance of the revenue the factual aspects were re-examined. Tribunal notes that the paper book containing 1029 pages were filed and all documents were placed before the learned tribunal and after noting the facts the learned tribunal came to the conclusion that the CIT (A) was well justified in deleting the addition made under Section 68 of the Act. No substantial question of law arising for consideration in this appeal.

Summary

The core legal questions considered by the Court in this appeal under Section 260A of the Income Tax Act, 1961, pertain primarily to the validity of the addition made under Section 68 of the Act on account of alleged bogus share capital and share premium. Specifically, the issues are:

(1) Whether the Income Tax Appellate Tribunal (the Tribunal) erred in law by upholding the deletion of the addition under Section 68 despite the Assessing Officer's (AO) remand report stating that the share applicant companies lacked creditworthiness to invest in the assessee company.

(2) Whether the Tribunal erred in ignoring the fact that the Commissioner of Income Tax (Appeals) (CIT (A)) did not consider that the investor companies had filed income tax returns showing negligible taxable income and that their reserves and surplus largely consisted of share capital.

(3) Whether the Tribunal erred in upholding the CIT (A)'s finding that the assessee had established the identity and creditworthiness of the share applicants and the genuineness of the transactions merely because the transactions were routed through banking channels, contrary to the jurisdictional High Court's rulings that mere payment by account payee cheque does not render a non-genuine transaction genuine.

(4) Whether the Tribunal erred in upholding the deletion of the addition on the ground that the investing companies were registered body corporates and assessed to income tax, ignoring that such registration and assessment are not sufficient to discharge the burden on the assessee to establish creditworthiness and genuineness of the transactions.

The detailed analysis of these issues is as follows:

Issue 1 & 2: Whether the identity, creditworthiness, and genuineness of the share applicants and transactions were adequately established despite the AO's remand report and financial weakness of investor companies

The relevant legal framework under Section 68 of the Income Tax Act requires the assessee to explain the nature and source of unexplained cash credits, including share capital or share premium credited to its books. The burden lies on the assessee to establish the identity, creditworthiness of the investors, and genuineness of the transaction. Precedents emphasize that mere filing of documents is insufficient; the genuineness must be satisfactorily demonstrated.

In this case, the AO initially doubted the genuineness of the share capital and premium, considering the share applicant companies as shell or paper companies lacking creditworthiness. The AO's assessment order noted that the share premium was abnormally high and that the financial strength of the assessee did not justify such transactions. The AO also pointed out that the investor companies had filed income tax returns showing negligible taxable income, and their reserves mainly comprised share capital.

However, the CIT (A), upon calling for two remand reports from the AO and examining the documentary evidence and statements recorded under Section 131 of the Act from the directors of the assessee and the investor companies, found that the identity and creditworthiness of the share applicants were satisfactorily established. The CIT (A) noted that the AO had conducted independent enquiries, including field enquiries by departmental inspectors, and had recorded satisfaction about the nature and source of the credits. The CIT (A) also observed that the AO himself had admitted that the share capital was explained and credited in the books of the assessee.

The CIT (A) further noted that the investor companies were body corporates registered with the Registrar of Companies and individually assessed to income tax, which, while not conclusive, was a relevant factor in establishing creditworthiness. The Tribunal affirmed the CIT (A)'s findings after considering the voluminous documentary evidence and remand reports.

The Court emphasized that the CIT (A) had conducted an elaborate exercise, including calling for multiple remand reports and examining the directors in person, which went beyond mere paper verification. The Court found no error in the CIT (A)'s and the Tribunal's conclusion that the identity and creditworthiness of the share applicants were established.

Issue 3: Whether the CIT (A) erred in relying on banking channel transactions to establish genuineness, contrary to precedent

Precedents from the jurisdictional High Court have held that mere payment by account payee cheque does not sanctify a transaction or convert a non-genuine transaction into a genuine one. The revenue contended that the CIT (A) erred by relying on banking channels as the sole basis to uphold the genuineness of the share capital and premium.

The Court noted that the CIT (A) did not rely solely on the fact that transactions were routed through banking channels. Instead, the CIT (A) considered the entire gamut of evidence, including the identity and creditworthiness of the investors, the detailed enquiries conducted by the AO, and the financial growth and prospects of the assessee company. The CIT (A) specifically addressed the issue of high share premium and found that it was justified by the anticipated future prospects of the company, its growing turnover, impressive inventories of quoted equity shares, and increasing profits and earnings per share.

The Court observed that the CIT (A) had applied a fact-sensitive approach rather than a mechanical reliance on banking transactions. The Tribunal concurred with this reasoning, and the Court found no infirmity in the approach.

Issue 4: Whether registration and assessment of investor companies suffice to discharge the burden of proof regarding creditworthiness and genuineness

The revenue argued that merely being registered body corporates and being assessed to income tax cannot be the litmus test for creditworthiness and genuineness of the transactions under Section 68.

The Court acknowledged this legal principle but found that in the present case, the CIT (A) and the Tribunal did not rest their conclusions solely on registration and assessment. Instead, these were part of a broader factual matrix, including independent enquiries, examination of directors, field enquiries, and analysis of financial growth and business prospects of the assessee company.

The Court held that the CIT (A)'s and Tribunal's findings were based on a comprehensive evaluation of all relevant factors and evidence, and thus the reliance on registration and assessment was not in isolation but as corroborative factors. Therefore, no error of law was committed in this regard.

Additional Analysis: Consideration of High Share Premium and Financial Growth of the Assessee

The revenue contended that the high share premium charged was abnormally high and unjustified, and that the CIT (A) failed to properly consider this aspect. The CIT (A)'s order, however, contained detailed findings on this point. It was found that the premium was paid on account of anticipated future prospects and prudent investment decisions by the investor companies' boards.

The CIT (A) noted the assessee company's incorporation in 1992, its engagement in investment and finance business, and its dealing in quoted equity shares with a turnover rising from Rs. 8.99 crore in the preceding year to Rs. 12.46 crore in the assessment year. The company's inventories of quoted equity shares were substantial, and its profits had grown over threefold between the two years, with earnings per share increasing significantly. These facts demonstrated the company's growth and profitability, supporting the justification for the high share premium.

The CIT (A) also pointed out that the AO had acknowledged that investments were made on personal contact and persuasion but had not analyzed the implications of this observation in the context of the facts.

The Court found that the CIT (A) had thoroughly examined the aspect of high share premium and found it justified on the facts and circumstances, a view endorsed by the Tribunal. Accordingly, the Court rejected the revenue's contention that this aspect was ignored or brushed aside.

Treatment of Precedents

The revenue relied on decisions which emphasize strict scrutiny of unexplained cash credits and the need for the assessee to discharge the burden of proof by establishing identity, creditworthiness, and genuineness. The Court acknowledged these precedents but distinguished them on facts, noting that in the present case, the CIT (A) had undertaken a detailed and elaborate inquiry, supported by remand reports and evidentiary material, which was absent in the cited cases.

The Court held that the principles in these precedents must be applied in light of the facts and circumstances of each case and that the present case was factually distinguishable from those decisions.

Conclusions

The Court concluded that the CIT (A) and the Tribunal had correctly applied the law and facts in holding that the assessee had satisfactorily explained the nature and source of the share capital and premium, established the identity and creditworthiness of the investors, and demonstrated the genuineness of the transactions. The alleged high share premium was found to be justified by the company's growth and prospects. The AO's initial doubts were addressed through extensive enquiries and documentary evidence.

The Court found no substantial question of law arising for consideration and dismissed the revenue's appeal.

Significant holdings include:

"The CIT (A) had made an elaborate exercise to examine the facts, called for two remand reports after which finding has been recorded in favour of the assessee."

"The identity and the creditworthiness of the share applicant companies stands established."

"The assessing officer himself has stated that the investment take place on personal one to one contact and persuasion but did not analyze the meaning and implication of the observation by applying them to the fact and circumstances of the case."

"The assessee company was showing good returns and were showing good profits for its investors and it is a growing company."

"The question of treating the share premium as unexplained or unjustified is contrary to law."

"The above decisions cannot be applied to the facts and circumstances of the case on hand."