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2025 (5) TMI 749 - AT - Income TaxAddition u/s 68 - share application money received from two companies as unexplained credits - HELD THAT - It is settled proposition that as per the provisions of section 68 initial burden is on the assessee to establish the genuineness of the transaction creditworthiness and identity of the share applicant. Thus the identity and capacity of the person to subscribe the shares has to be established by producing some cogent evidence. Similarly the genuineness of the transaction is also required to be established from the fact that the applicant was having the capacity and creditworthiness. Since the assessee has failed to discharge the burden cast upon it with respect to establish the creditworthiness of the share applicants nor the findings of CIT(A) are controverted by placing on record some reliable material to the satisfaction of lower authorities thus in our considered opinion the AO has rightly made the additions. By respectfully following the judgment of NRA Iron and Steel Pvt. Ltd. 2019 (3) TMI 323 - SUPREME COURT and Nova Promoters 2012 (2) TMI 194 - DELHI HIGH COURT the additions made by AO is hereby confirmed. As a result grounds of appeal No. 1 2 taken by the assessee are dismissed. Disallowance made of Loss on sale of Fixed assets - We find that assessee has debited a sum in its Profit and Loss Account on account of loss on sale of assets. Such loss is not allowable expenditure u/s 37 of the Act and as per the concept of block of asset to compute the depreciation the sale price of the asset sold should be reduced from the gross value of block of assets and assessee can claim depreciation on the residuary value of block of that asset. However the loss cannot be claimed as business expenditure and must be added to the total income. No infirmity in the order of lower authorities. Accordingly the action of the AO in making disallowance on sale of fixed assets and sustained by ld. CIT(A) is hereby confirmed. Accordingly ground of appeal No.3 of the assessee is dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are: (a) Whether the addition of Rs. 1,00,00,000/- made under section 68 of the Income Tax Act, 1961 (the Act) on account of unexplained share application money received from two private limited companies is justified, having regard to the genuineness, creditworthiness, and identity of the share applicants; (b) Whether the receipt of share application money from these two companies violates the provisions of the Companies Act and public policy, thereby rendering such receipt inadmissible for income tax purposes; (c) Whether the disallowance of loss on sale of fixed assets amounting to Rs. 1,60,915/- under section 37 of the Act is justified; (d) Whether the charging of interest under sections 234A, 234B, and 234C of the Act is valid and proper. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a) and (b): Addition under Section 68 on Share Application Money Received from Two Companies Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act empowers the Assessing Officer (AO) to treat any sum credited in the books of an assessee as income if the assessee fails to satisfactorily explain the nature and source of such credit. The initial burden lies on the assessee to establish three essential ingredients: the identity of the share applicants, the genuineness of the transactions, and the creditworthiness of the parties. This principle has been reiterated in several Supreme Court decisions, including CIT vs Durga Prasad More (1971) 82 ITR 540 (SC), and more recently in PCIT vs NRA Iron and Steel Pvt. Ltd. (412 ITR 161 (SC)), which emphasized that mere filing of primary evidence does not discharge the onus if the investor companies have meagre or nil income and cannot explain the source of funds invested. Further, the Companies Act prohibits private limited companies from inviting the public to subscribe to shares. Receipt of share application money from such companies, if violative of these provisions, may be held as contrary to law and public policy. Explanation 1 to Section 37 of the Act disallows any expenditure or receipt incurred in violation of law. Several case laws were relied upon by the AO and CIT(A) to uphold the addition, including CIT vs Durga Prasad More, Sumati Dayal vs CIT, McDowell & Co. Ltd, Roshan D Hatti vs CIT, CIT vs Biju Patnaik, and decisions of the Delhi High Court in CIT vs Divine Leasing and Finance Ltd. and CIT vs Nipun Builders & Developers. Court's Interpretation and Reasoning: The AO scrutinized the share application money received from nine companies totaling Rs. 2.31 crores. While accepting the genuineness of seven companies, the AO doubted the creditworthiness of two companies-M/s Amarlaxmi Dealtrade Pvt. Ltd. and M/s Samrat Finvestors Pvt. Ltd.-which contributed Rs. 1 crore (Rs. 50 lakhs each). The AO's conclusion was based on the financial statements of these companies, which showed low business activity and meagre profits, raising suspicion about their ability to invest such large sums. The assessee filed documents such as share application forms, PAN, ITRs, bank statements, and balance sheets of the companies to establish identity, genuineness, and creditworthiness. However, the AO found these insufficient, especially as the assessee failed to produce the ITRs for the relevant assessment year 2022-23 despite repeated directions, which was critical to ascertain the tax compliance and financial position of these companies. The CIT(A) upheld the AO's findings, emphasizing the violation of the Companies Act by the assessee in accepting share application money from private limited companies in contravention of the prohibition on public invitation of shares. The CIT(A) relied on Explanation 1 to Section 37 to hold that such receipts are not allowable and constitute an infraction of law, thereby justifying the addition. The CIT(A) also distinguished the facts of the present case from other cited precedents where the companies involved were not private limited companies or where the violation of the Companies Act was not established. The Tribunal noted that the AO and CIT(A) had conducted an in-depth inquiry, including field enquiries and examination of financials, and that the assessee did not controvert the detailed findings with reliable evidence. The Tribunal also referred to the Supreme Court's directive to consider surrounding circumstances and human probabilities rather than merely accepting documentary evidence at face value. Key Evidence and Findings: - Share application money of Rs. 2.31 crores received from nine companies, with Rs. 1 crore from two companies under scrutiny. - Financial statements of the two companies showed low business activity and insufficient income to justify the investment. - Failure of the assessee to produce ITRs for the relevant year despite directions. - Violation of Companies Act provisions by accepting share application money from private limited companies in a manner tantamount to public invitation. Application of Law to Facts: The Tribunal applied the legal principles under section 68, requiring the assessee to prove identity, genuineness, and creditworthiness. The failure to establish creditworthiness and the violation of the Companies Act led to the conclusion that the share application money was unexplained credit and liable to be added to income. The Tribunal also applied the principle that receipts or expenditures in violation of law or public policy are not allowable for tax purposes. Treatment of Competing Arguments: The assessee argued that all necessary documents were filed, the companies were genuine, and the AO's addition was based on conjecture. The Tribunal rejected these contentions, noting the detailed inquiry by AO and CIT(A), the failure to produce critical documents, and the legal prohibition under the Companies Act. The Tribunal also distinguished the case laws cited by the assessee on the basis of factual differences. Conclusions: The addition of Rs. 1 crore under section 68 on account of unexplained share application money received from the two companies was confirmed. Issue (c): Disallowance of Loss on Sale of Fixed Assets Relevant Legal Framework and Precedents: Under the Income Tax Act, loss on sale of fixed assets is not allowable as a business expenditure under section 37. Instead, the sale price is adjusted against the block of assets for the purpose of computing depreciation. The loss is not separately deductible. Court's Interpretation and Reasoning: The Tribunal found that the assessee had debited Rs. 1,60,915/- as loss on sale of fixed assets in the Profit and Loss Account but failed to add back this amount to income as required. The AO disallowed the loss on this ground, and the CIT(A) confirmed the disallowance. The Tribunal agreed with the lower authorities, holding that the loss on sale of assets is not allowable as business expenditure and must be added back to income. Application of Law to Facts: The Tribunal applied the statutory provisions regarding block of assets and depreciation and found no infirmity in the disallowance. Conclusions: The disallowance of Rs. 1,60,915/- on account of loss on sale of fixed assets was upheld. Issue (d): Charging of Interest under Sections 234A, 234B, and 234C Relevant Legal Framework: Sections 234A, 234B, and 234C of the Income Tax Act provide for levy of interest for delay in filing return, non-payment or short payment of advance tax, and deferment of advance tax installments respectively. Court's Interpretation and Reasoning: The Tribunal observed that the charging of interest under these provisions is consequential to the assessment and addition made. It directed the AO to charge interest as per law. Conclusions: The interest charges under sections 234A, 234B, and 234C were upheld subject to proper computation by the AO. 3. SIGNIFICANT HOLDINGS "The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were required to look into the surrounding circumstances to find out the reality of the recitals made in those documents." (CIT vs Durga Prasad More) "The practice of conversion of un-accounted money through the cloak of Share Capital/Premium must be subjected to careful scrutiny. This would be particularly so in the case of private placement of shares, where a higher onus is required to be placed on the Assessee since the information is within the personal knowledge of the Assessee. The Assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the Assessee." (PCIT vs NRA Iron and Steel Pvt. Ltd.) "As per the provisions of section 68 of the IT Act, the initial burden is on the assessee to establish the genuineness of the transaction, creditworthiness and identity of the share applicant... Since the assessee has failed to discharge the burden cast upon it with respect to establish the creditworthiness of the share applicants... the AO has rightly made the additions." (Tribunal) "Any receipt received by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been received for the purpose of business and no deduction or allowance shall be allowed in respect of such receipt/expenditure." (Explanation 1 to Section 37 of the Income Tax Act) "The receipt of share application money by the Appellant - Choudhary Earth Movers Private limited - Company, from public - such as from M/S. Amarlaxmi Dealtrade Private Ltd. & M/s. Samrat Finvestors Private Ltd., is against the Public Policy of the Country & Companies Act, and therefore the addition made on this account... is hereby CONFIRMED." (CIT(A)) "Loss on sale of fixed assets is not allowable expenditure under section 37 of the Act and must be added back to income as per the concept of block of assets for depreciation computation." (Tribunal) The appeal was dismissed on all grounds except that the AO was directed to charge interest under sections 234A and 234B as per law.
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