2025 (6) TMI 1613 - AT - Income Tax

Addition u/s 68 - addition on account of share application money - Onus to prove - unexplained credits - as per AO primary onus on the assessee company to prove the creditworthiness of the share applicant not proved - As per AO unreasonably huge amount of share premium was taken on the shares issued despite the fact that the assessee s financials were weak and did not support such a huge premium. HELD THAT - The assessee having discharged primary onus by filing all necessary documents the onus thereafter shifted to the Department who needed to carry out further inquiry before arriving at any conclusion or finding with regard to the explanation furnished by the assessee being unsatisfactory and having failed to do so therefore the CIT(A) we hold has rightly held that the explanation of the assessee cannot be said to be unsatisfactory for the purpose of invoking section 68 of the Act. The case of the Revenue of the credit worthiness of the share applicant not being established is we find incorrect. The assessee having demonstrated the fact of the share applicant having made investment through banking channels and having even provided details of the source from where the share applicant made the advance by giving details of all credits appearing in his bank account the creditworthiness of the share applicant was we hold sufficiently demonstrated. The case of the Revenue if any we find merely rests on the financials of the assessee-company not supporting the huge premium collected by it but that we agree with the ld. CIT(A) cannot be the ground for doubting the explanation of the assessee particularly when all documentary evidences to prove the genuineness of the transactions have been filed by the assessee and there is no infirmity found by the Department in the same. As decided in Chain House International P.Ltd. 2019 (2) TMI 1213 - SC ORDER in this regard is apt wherein the Hon ble Apex court has categorically held that once the genuineness credit-worthiness and identity of the investors are established no addition can be made of cash credit on the ground that shares were issued at excess premium. Assessee appeal allowed. Validity of reopening of assessment - reasons to believe - new information in the possession of the AO for reopening the case of the assessee or not? - HELD THAT - DR was unable to controvert the factual findings of the CIT(A) that the information or basis on which the reopening was resorted to by the AO was also in the possession of the AO during the original assessment proceedings who had duly examined it questioned the assessee regarding it and to which the assessee had furnished explanation duly substantiated with evidences. The findings of the CIT(A) therefore that there was no new information in the possession of the AO for reopening the case of the assessee and that reopening was resorted to only on a change of opinion is therefore factually correct. DR had no quarrel with the proposition of law applied by the CIT(A) for holding the reassessment proceedings to be invalid since it was based on mere change of opinion of the AO and there was no new information in the possession of the AO. Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

(a) Whether the Assessing Officer (AO) was justified in making additions under section 68 of the Income Tax Act, 1961 ("the Act") on account of share application money received by the assessee-company, on the ground that the creditworthiness of the share applicant was not satisfactorily established.

(b) Whether the assessee discharged the primary onus cast upon it to prove the identity, genuineness, and creditworthiness of the share applicant and the source of share application money.

(c) Whether the AO was obligated to conduct further inquiry after the assessee submitted documentary evidence to substantiate the source of funds before making additions under section 68.

(d) Whether the reassessment proceedings initiated under section 147 read with section 148 of the Act for Assessment Year 2013-14 were valid, particularly whether reopening was based on new information or merely a change of opinion by the AO.

(e) Whether the CIT(A) erred in quashing the reassessment notice and order for AY 2013-14 on the ground of invalid reopening.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Validity of addition under section 68 on account of share application money and discharge of primary onus by the assessee (AY 2009-10 and 2010-11)

Relevant legal framework and precedents: Section 68 of the Act deals with unexplained credits. When an assessee receives share application money, the onus is on the assessee to explain the nature and source of such credit. The Supreme Court has held that the assessee must establish the identity, genuineness, and creditworthiness of the investor. Mere filing of primary evidence such as PAN, ITR, bank statements, and confirmation letters is the first step, and thereafter the AO must conduct further inquiry if dissatisfied. Referenced decisions include Pr.CIT vs. Chain House International Pvt. Ltd. and Pr.CIT vs. NRA Iron & Steel Pvt. Ltd.

Court's interpretation and reasoning: The AO made additions under section 68 on the ground that the share applicant, a director of the company, had meager income (Rs. 10,650 for AY 2009-10 and Rs. 78,710 for AY 2010-11) which did not justify the huge share application money (Rs. 2.02 crores and Rs. 1.88 crores respectively). The AO also noted cash credits in the bank account of the share applicant immediately prior to the investment, which were unexplained. The AO concluded the assessee failed to prove creditworthiness and source, and the premium charged was unrealistic given the company's lack of turnover.

The CIT(A), however, found that the assessee had discharged its primary onus by submitting the identity of the investor (PAN, ITR), confirmation letters, bank statements showing banking channel transactions, and details of persons who had credited amounts to the investor's bank account (source of source). The CIT(A) noted that the AO did not conduct any further inquiry or investigation after these submissions. The CIT(A) relied on judicial precedents holding that once primary evidence is furnished, the burden shifts to the AO to make further inquiry before rejecting the explanation.

Key evidence and findings: The assessee produced confirmation letters from the investor, copies of his income tax returns, bank statements evidencing credits and debits, and details of third parties who had funded the investor. The AO did not dispute the authenticity of these documents but found the financial capacity of the investor insufficient and the premium charged excessive.

Application of law to facts: The Tribunal agreed with the CIT(A) that the assessee had discharged the primary onus under section 68 by furnishing all requisite documents and explanations. The Tribunal held that the AO's failure to conduct any further inquiry or investigation before making additions was improper. The Tribunal also held that the AO cannot reject the explanation solely on the basis of the company's financial weakness or the high premium charged, once the genuineness and creditworthiness of the investor are established.

Treatment of competing arguments: The Revenue relied on the Supreme Court decision in NRA Iron & Steel Pvt. Ltd. to argue that mere submission of documents is insufficient and that the creditworthiness was not proved. The Tribunal distinguished this precedent on facts, noting that in NRA Iron & Steel, the AO's field inquiry revealed non-existence of investors, whereas here no such inquiry was conducted and the investor was a known director with verifiable documents.

Conclusions: The Tribunal upheld the deletion of additions under section 68 for AY 2009-10 and 2010-11, confirming that the assessee discharged its primary onus and the AO failed to make further inquiries before making additions.

Issue (c): Obligation of AO to conduct further inquiry after submission of primary evidence

Relevant legal framework and precedents: The principle is well-established that once the assessee produces primary evidence to explain the nature and source of credit, the AO must conduct further inquiries if dissatisfied before making additions under section 68. This principle was reiterated in decisions cited by the CIT(A) and the Tribunal.

Court's interpretation and reasoning: The CIT(A) and the Tribunal found that the AO did not conduct any inquiry beyond examining the bank statements and did not question the investor or the third parties who credited the investor's account. This was held to be a failure on the part of the AO to discharge his duty before making additions.

Conclusions: The AO's action was held to be contrary to settled legal principles, warranting deletion of additions.

Issue (d) & (e): Validity of reassessment proceedings under section 147/148 for AY 2013-14

Relevant legal framework and precedents: Reassessment proceedings under section 147 can be initiated only if the AO has "reason to believe" that income has escaped assessment based on new information or material. Reopening on the basis of mere change of opinion is impermissible. The Supreme Court and High Courts have repeatedly held that reopening must be based on tangible material not previously considered.

Court's interpretation and reasoning: For AY 2013-14, the AO reopened the assessment on the same issue of share application money, relying on the same information that was available and examined during the original assessment under section 143(3). The CIT(A) examined the record and found that the AO had accepted the assessee's explanation during the original assessment, and no new material had come to light. The AO's reopening was thus held to be based on mere change of opinion.

Key evidence and findings: The CIT(A) noted that the AO had issued notices, called for bank statements and ITRs of the investor, and examined the share application money issue during original assessment. The reassessment notice was issued without any fresh information or material. The AO did not conduct any new inquiry or find any new facts.

Application of law to facts: The Tribunal agreed with the CIT(A) that reopening was invalid as it was based on a mere change of opinion. The Tribunal relied on the principle that reassessment cannot be resorted to simply because the AO is dissatisfied with the earlier conclusion without any new material.

Treatment of competing arguments: The Revenue did not dispute the legal proposition but contended that the AO had tangible material. The Tribunal found no evidence of new material and accepted the CIT(A)'s factual findings.

Conclusions: The reassessment proceedings and consequent additions for AY 2013-14 were quashed as invalid.

3. SIGNIFICANT HOLDINGS

"The appellant has discharged its primary onus by filing the required documents and explanation before the AO."

"Once it is held that the appellant has discharged its primary onus then it is necessary to see whether AO has conducted any enquiry/investigation to find out whether the explanation given is satisfactory or not... In the present case, the AO has not made any enquiries. Hence on this count, the addition made by the AO in the hands of the appellant is incorrect."

"The AO is duty bound to conduct enquiry on the submissions made by the appellant, if not satisfied. As stated above in the present case, the AO has not made any enquiries. Hence on this count, the addition made by the AO in the hands of the appellant is incorrect."

"Reopening of assessment merely on the basis of change of opinion subsequent to original assessment framed u/s 143(3) of the Act is not valid."

"Where during the original assessment, the assessee's claim was processed at length and after calling for detailed explanation from him the same was accepted, merely because a certain element or angle was not in mind of the AO while accepting such a claim, it cannot be a ground to start the reassessment proceedings."

"Once the genuineness, credit-worthiness and identity of the investors are established, no addition can be made of cash credit on the ground that shares were issued at excess premium."

Core principles established include:

• The primary onus under section 68 is on the assessee to prove identity, genuineness, and creditworthiness of the investor and source of share application money.
• Submission of primary evidence such as PAN, ITR, bank statements, and confirmation letters discharges the primary onus.
• Thereafter, the AO must conduct further inquiry before rejecting the explanation and making additions.
• Reopening of assessment under section 147/148 must be based on new tangible material and not mere change of opinion.
• Financial weakness of the assessee-company or high premium charged cannot alone justify additions once genuineness and creditworthiness are established.

Final determinations:

• The additions under section 68 for AY 2009-10 and 2010-11 were rightly deleted by the CIT(A) and the Tribunal upheld the same.
• The reassessment proceedings for AY 2013-14 were invalid as they were based on mere change of opinion and were quashed.
• All appeals filed by the Revenue were dismissed.