2025 (6) TMI 1689 - AT - Income Tax

Addition u/s 68 - share capital/share premium treated as unexplained cash credit - as per AO assessee has issued share capital/share premium at high premium and there was no compliance to the summons issued - CIT(A) has deleted the addition by giving a very detailed finding and by passing a speaking order to the effect that the six (6) subscribers companies directors as well as one individual subscriber appeared before the AO and their statements were recorded on oath. HELD THAT - CIT(A) as noted on the observation of the Assessing Officer that there was no justification for issuance of share at a high premium by observing that assessee company was going to invest in concern which was a joint venture with assessee company with 51% and 49% partnership respectively. CIT(A) noted that Delsey SA is a French Company founded in the year 1946 and is engaged in the business of luggage and travel accessories with around 6000 active sales outlets across the globe and having a turnover of about 130 Million Euro as of 2010 and it holds second place in the global luggage market behind Samsonite. Therefore CIT(A) correctly noted that the assessee has all the reasons to issue share at a high premium. CIT(A) noted that in the course of scrutiny proceeding for AY 2016-17 AO enquired into the details of issue of share to the same allottees and considered the allotment of shares as genuine and bona fide in the order passed u/s. 143(3). CIT(A) noted that in the subsequent year i.e. AY 2014-15 2024 (6) TMI 1144 - ITAT KOLKATA the coordinate bench deleted the addition made by AO from the same subscribers. Order of Ld. CIT(A) upheld by dismissing the appeal of the revenue.

Summary

The core legal question considered in this appeal is whether the addition of Rs. 1,97,00,000/- made by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961, treating the share capital and share premium received by the assessee as unexplained cash credit, was justified.

The issue arises from the AO's rejection of the genuineness of the share capital and premium received by the assessee company during the assessment year 2012-13. The AO doubted the source and valuation of the share premium, alleging that the funds originated from companies controlled by the main promoter and that the premium was unreasonably high given the lack of past business record of the joint venture in India. The appellate authority, the Commissioner of Income Tax (Appeals), NFAC, Delhi, deleted the addition after detailed consideration of evidence and submissions.

Regarding the legal framework, section 68 of the Income Tax Act places the burden on the assessee to explain the nature and source of any unexplained cash credit appearing in its books. The AO must be satisfied about the identity, genuineness, and creditworthiness of the share subscribers and the consideration received. Precedents establish that mere issuance of shares at a premium is not suspect if the premium is justified by the company's business prospects and valuation, and if the subscribers' credentials are satisfactorily established.

The AO's reasoning was primarily based on two points: (1) the share premium was high (Rs. 90 per share on a face value of Rs. 10), and (2) the source of funds traced back to companies controlled by the promoter, raising suspicion of round-tripping or sham transactions. The AO also relied on the lack of compliance by two subscribers to summons under section 131 of the Act.

The appellate authority examined the evidence on record, including the summons compliance by six directors and one individual subscriber whose statements were recorded on oath, share allotment details, bank statements, income tax returns, and audited financial statements of the subscribers. The appellate authority noted that the AO's suspicion about the source of funds being linked to promoter-controlled companies was insufficient to discredit the genuineness of the transactions, especially when the subscribers' identity and creditworthiness were otherwise established.

Further, the appellate authority scrutinized the valuation of the share premium in light of the business rationale. The assessee company was set up as a joint venture with M/s Delsey SA, a reputed French company with a longstanding global presence and significant market share in the luggage industry. The appellate authority highlighted that Delsey SA had been operating in India since 2001 and had strategic reasons for forming the joint venture, including expanding its retail footprint in the growing Indian luggage market.

The appellate authority observed that the company's future prospects and underlying assets justified the premium charged on shares. It was noted that the joint venture was not a start-up or a shell company but a legitimate business entity with ongoing operations and growth potential, as evidenced by financial statements. The appellate authority also relied on the fact that in subsequent assessment years, the AO had accepted similar share allotments to the same subscribers as genuine, reinforcing the credibility of the transactions in the impugned year.

The appellate authority further considered the procedural compliance, noting that summons under section 131 were complied with by most subscribers, and the non-appearance of two subscribers did not vitiate the entire transaction. The appellate authority concluded that the AO's treatment of the share capital and premium as unexplained cash credit was unjustified and deleted the addition accordingly.

On appeal to the Tribunal, the revenue challenged the appellate order. The Tribunal examined the detailed findings of the CIT(A), including the recorded statements, documentary evidence, and the business rationale for the premium. The Tribunal observed that the appellate authority had passed a speaking order with cogent reasoning addressing the AO's concerns.

The Tribunal emphasized the credibility of the share subscribers established through their appearance and statements, the legitimate business background of the joint venture partner Delsey SA, and the acceptance of similar transactions in subsequent years by the AO. The Tribunal noted that the AO's suspicion based on promoter control of subscriber companies and the high premium was rebutted by the evidence and business justification.

Considering these factors, the Tribunal upheld the deletion of the addition, dismissing the revenue's appeal.

The significant holdings include the following:

"The identity, creditworthiness and genuineness of the share subscribers as well as the basis of valuation of the share premium in the case of the appellant company have been reasonably established."

"The treatment by the A.O of the sum of Rs. 1,97,00,000/- being the amount of share capital/premium issued by the assessee company as unexplained cash credit u/s 68 for the A.Y 2012-13 is unjustified."

"Delsey SA is a French Company, founded in the year 1946, engaged in the business of luggage and travel accessories, with around 6000 active sales outlets and having a turnover of about 130 Million Euro as of 2010. It holds second place in the global luggage market, behind Samsonite."

These principles affirm that where the assessee satisfactorily establishes the identity, genuineness, and creditworthiness of the share subscribers, and where the share premium is justified by business prospects and valuation, additions under section 68 cannot be sustained merely on suspicion or promoter linkage.

In conclusion, the Tribunal confirmed the appellate authority's order deleting the addition of Rs. 1,97,00,000/- made under section 68, holding that the share capital and premium received were genuine and bona fide, and the AO's addition was rightly set aside.