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2025 (6) TMI 908 - HC - Income TaxAddition u/s 68 - bogus share capital premium - HELD THAT - We find that the AO has committed a factual mistake which has ultimately led to an order being passed without reference to the nature of the activities done by the assessee. AO proceeded on the basis that the assessee is a company engaged in investment in shares and trading of shares. This finding is factually incorrect as the assessee is a manufacturing company and they have set up their unit in the Falta Special Economic Zone after obtaining the requisite letter of permission from the Development Commissioner Falta Special Economic Zone dated May 5, 2006. Development Commissioner of the Falta Special Economic Zone has certified that the assessee has been granted approval for setting up of a unit for manufacture and export of quilts and pillows vide letter of approval dated 5th May 2006. This fundamental error committed by the Assessing Officer is grave and it has impacted the assessment order in toto. This aspect of the matter has not been duly appreciated by the CIT(A). We find from the assessment order that the assessee had submitted reply to all the queries which have been raised and responded to the notices which were issued. The AO records that the replies received from the assessee company are kept on record and the details and contentions of the assessee company were perused and considered. However the same are not acceptable. No reasons are forthcoming as to why the replies details and documents produced by the assessee are not acceptable by the Assessing Officer. Furthermore the Assessing Officer observes that there was compliance on the part of the assessee company but in turn would state that certain facts are not clear. This again is a very vague statement as the Assessing Officer could have very well verified this factual issues which required clarification. assessee had produced the necessary documents in the form of a paper book containing 436 pages which discloses the entire details namely share application forms source of funds bank statement audited accounts copy of income tax acknowledgment and copy of PAN card. The learned Tribunal has noted that the Department did not make any objection to the three ingredients which are required to be proved while making an addition under Section 68. Furthermore the veracity of the documents which were produced by the assessee were never disputed by the Assessing Officer or by the CIT(A) on facts we find that the assessee has not invested any money out of the share capital raised in any other company but the funds so raised have been used to repay its short-term and long-term loans borrowed from various banks and financial institutions. Furthermore the assessee company has an investment of Rs. 10.59 Crore in fixed assets as on 31.3.2012 and inventory of Rs.2.35 Crore for the financial year ending 31.3.2011. The assessee s export turnover was Rs. 2.56 Crore. With regard to lack of business activity during the assessment year under consideration the assessee has given an explanation stating that they were the sole suppliers to a foreign buyer namely IKEA for supply of its goods. However the contract was terminated on account of which the manufacturing unit of the assessee had to be closed down temporarily and thereafter during the assessment year 2014-15 the assessee commenced its business operation and consistently has been showing profit and has been paying income tax. Assessee appeal allowed.
1. ISSUES PRESENTED and CONSIDERED
The Court considered the following core legal questions arising under the Income Tax Act, 1961, specifically Section 68, which pertains to unexplained cash credits: a) Whether the Income Tax Appellate Tribunal (ITAT) erred in law by deleting the addition of Rs. 5,07,00,000/- made under Section 68 on account of alleged bogus share capital and premium; b) Whether the ITAT erred in law by accepting the assessee's submission of bank statements, audited accounts, income tax acknowledgements, and PAN cards of shareholders as sufficient proof to discharge the burden of establishing the creditworthiness of investing companies and the genuineness of the transaction, contrary to the precedent set by the Jurisdictional High Court in the case of M/s. BST Infratech Ltd; c) Whether the ITAT failed to consider the additional onus on closely held companies to prove the source of money in the hands of shareholders or persons making payments towards share issuance, as emphasized in the Jurisdictional High Court's decision in PCIT vs M/s BST Infratech Ltd. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a): Validity of Deletion of Addition under Section 68 on Account of Alleged Bogus Share Capital and Premium Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act empowers the Assessing Officer to treat unexplained cash credits as income if the assessee fails to satisfactorily explain the nature and source of the credit. The three essential ingredients to be proved under this section are: (i) the identity of the creditor, (ii) the genuineness of the transaction, and (iii) the creditworthiness of the creditor. The burden lies on the assessee to establish these elements. Court's Interpretation and Reasoning: The Court noted a fundamental factual error committed by the Assessing Officer (AO), who incorrectly classified the assessee as a company engaged in share investment and trading, whereas the assessee was a manufacturing company operating in the Falta Special Economic Zone (SEZ) with valid approval from the Development Commissioner for manufacturing and export of quilts and pillows. This mischaracterization undermined the AO's basis for treating the share capital as bogus. Key Evidence and Findings: The assessee had submitted comprehensive documentation including share application forms, bank statements, audited accounts, income tax acknowledgements, and PAN cards of shareholders. The Tribunal found no objection from the Department regarding the authenticity of these documents or the identity and creditworthiness of the shareholders. The assessee's use of the raised share capital was also examined, revealing that funds were utilized to repay loans and were not diverted to other companies. Application of Law to Facts: Given that the assessee satisfied the three essential criteria under Section 68 and that the AO's factual error distorted the assessment, the Court found no justification for the addition. The factual matrix indicated genuine transactions supported by credible documentation. Treatment of Competing Arguments: The revenue argued that the addition was justified due to the alleged bogus nature of the share capital and premium. However, the Court rejected this contention, emphasizing the absence of any dispute over the documents' veracity and the failure of the AO to provide concrete reasons for rejecting the assessee's explanations. Conclusion: The deletion of the addition by the ITAT was upheld as legally sound and factually justified. Issue (b): Sufficiency of Documents Submitted (Bank Statements, Audited Accounts, Income Tax Acknowledgements, PAN Cards) to Discharge Burden under Section 68 Relevant Legal Framework and Precedents: The Jurisdictional High Court in M/s. BST Infratech Ltd held that mere submission of documents like bank statements and PAN cards is not the litmus test for discharging the burden under Section 68. The assessee must establish the creditworthiness and genuineness of the transaction beyond such formalities. Court's Interpretation and Reasoning: The Court distinguished the present case from the precedent by highlighting that the Department did not dispute the genuineness or creditworthiness of the shareholders, nor did it challenge the authenticity of the documents. The ITAT had carefully considered the entire documentary evidence and found it sufficient to satisfy the requirements of Section 68. Key Evidence and Findings: The assessee presented a voluminous paper book of 436 pages containing detailed evidence. The Department's failure to raise objections to the key ingredients required under Section 68 was a critical factor. Additionally, the Court noted that the documents were not merely formal submissions but were supported by the assessee's operational history and financial performance. Application of Law to Facts: The Court applied the principles of Section 68 in the context of the undisputed documentary evidence and found that the burden was discharged. The Court emphasized that the test is not merely formal but substantive, and the facts showed substantive compliance. Treatment of Competing Arguments: The revenue's reliance on the BST Infratech Ltd decision was addressed by underscoring the factual distinctions and the absence of any challenge to the documents' veracity in the present case. Conclusion: The ITAT's acceptance of the documents as sufficient evidence to discharge the burden under Section 68 was affirmed. Issue (c): Additional Onus on Closely Held Companies to Prove Source of Money in Share Capital Transactions Relevant Legal Framework and Precedents: The Jurisdictional High Court in PCIT vs M/s BST Infratech Ltd held that closely held companies bear an additional onus to prove the source of funds contributed by shareholders or persons subscribing to shares before such sums can be accepted as genuine credits under Section 68. Court's Interpretation and Reasoning: The Court observed that while this principle is well-established, its applicability depends on the facts. In the present case, the assessee had satisfactorily demonstrated the source of funds through detailed documentation and had not invested the raised capital in other companies, but used it to repay loans. The Court found that the ITAT had duly considered these facts and found the additional onus fulfilled. Key Evidence and Findings: The assessee's financial statements showed substantial fixed asset investment and inventory, indicating genuine business operations. The explanation regarding temporary business closure due to termination of a contract with a foreign buyer was accepted, with subsequent resumption of profitable operations and tax payments. Application of Law to Facts: The Court applied the principle of additional onus to the facts and found that the assessee had met this requirement. The absence of any adverse finding by the AO or CIT(A) on this aspect reinforced the conclusion. Treatment of Competing Arguments: The revenue's argument that the additional onus was not discharged was rejected on the basis of the comprehensive evidence and factual findings by the ITAT. Conclusion: The Court upheld the ITAT's finding that the assessee had discharged the additional onus applicable to closely held companies under Section 68. 3. SIGNIFICANT HOLDINGS The Court held that: "The Assessing Officer has committed a factual mistake which has ultimately led to an order being passed without reference to the nature of the activities done by the assessee." "The document details and evidence produced by the assessee are sufficient to fulfill the three criteria as required under section 68 of the Act." "No question of law much less substantial question of law arises for consideration." The Court reaffirmed the principle that the burden under Section 68 lies on the assessee to prove the identity, genuineness, and creditworthiness of the source of share capital. However, this burden can be discharged by credible and undisputed documentary evidence. Mere formal submissions are insufficient if disputed, but in the absence of any challenge, such evidence is adequate. The Court emphasized that factual errors by the Assessing Officer, such as mischaracterization of the nature of the assessee's business, can vitiate the assessment process and justify interference with the addition made under Section 68. Finally, the Court dismissed the appeal filed by the revenue, holding that the ITAT's order deleting the addition was legally sound and factually justified, and no substantial question of law arose for its consideration.
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