2025 (7) TMI 955 - AT - Income Tax

Addition u/s 68 and 69C - receiving bogus share capital along with premium and commission expenses in arranging such a bogus share capital - HELD THAT - AO has made a detailed analysis and thereafter found the alleged share application money received by the assessee along with its premium is a bogus one. The assessee has pleaded that it is an assessment u/s 153A and addition is to be made qua the seized material found during the course of search. We find that AO while harbouring the belief that assessee has received share capital and a bogus share premium has made reference to the seized material namely Annexure AS-13 A-5 and A-3. It is discernible from page Nos. 2 to 8 of the impugned assessment order. Therefore after taking into consideration the orders of the Revenue Authorities we do not find any merit in this appeal. Appeal of the assessee is dismissed.

Summary

The core legal questions considered in this appeal pertain to the validity of additions made by the Assessing Officer (AO) under Sections 68 and 69C of the Income Tax Act, relating to alleged bogus share capital and share premium received by the assessee. Specifically, the issues are:

• Whether the share capital and share premium credited to the assessee's books constitute unexplained credits under Section 68 of the Income Tax Act.
• Whether the additions made under Section 69C for commission expenses incurred in arranging the alleged bogus share capital are justified.
• The applicability and scope of Section 68 in the context of share capital and share premium received by a company, particularly under the circumstances of a search and seizure operation under Section 132(1).
• The evidentiary requirements and standards for establishing identity, genuineness, and creditworthiness of shareholders under Section 68.
• The effect of prior decisions for earlier assessment years on the present appeal.

Issue-wise Detailed Analysis

1. Legality of Additions under Section 68 for Share Capital and Share Premium

The legal framework centers on Section 68 of the Income Tax Act, which deals with unexplained cash credits. Under this provision, when a company receives share application money, the onus lies on the assessee to prove:

1. The identity of the shareholders who have contributed the share capital.
2. The genuineness of the transactions, i.e., that the share capital is not a sham or accommodation entry.
3. The creditworthiness of the shareholders, establishing that the source of funds is legitimate.

The Court referred to authoritative precedents, notably the Delhi High Court decision in CIT vs Navodaya Castles Pvt. Ltd., which elucidates the dual approach in such cases. On one side, if the assessee produces adequate evidence including identity proofs, bank statements showing payment through banking channels, and affidavits from directors, the AO must accept the credit. On the other side, if the AO uncovers evidence indicating that the shareholder entities are mere paper companies without genuine sources of income, and that the share capital is arranged through accommodation entries, additions under Section 68 are warranted.

In this case, the AO conducted a search under Section 132(1) on the group companies and seized incriminating documents (AS-13, A-5, A-3) from the residence of a key individual and the assessee's premises. The AO found that the assessee received share capital of Rs. 11,90,000 and share premium of Rs. 1,07,10,000, which were allegedly bogus. The AO's detailed analysis, as reflected in the assessment order, concluded that the share capital and premium were accommodation entries arranged through payment of commission.

The CIT (Appeals) upheld the AO's findings, relying on the principle of consistency with earlier assessment years (2005-06 and 2006-07) where similar issues were adjudicated against the assessee. The Tribunal, after examining the record and the legal principles, concurred with the AO and CIT (Appeals), holding that the additions were justified under Section 68.

2. Additions under Section 69C for Commission Expenses

Section 69C empowers the AO to make additions for unexplained expenditure incurred in relation to the arrangement of bogus share capital. The AO found that commission expenses were paid to arrange the alleged bogus share capital, which were unexplained and thus liable to be added back to the income. The Tribunal accepted this reasoning in the absence of any contrary evidence from the assessee, especially since the assessee failed to appear or file any submissions in the appeal.

3. Application of Section 153A and Impact of Search and Seizure

The assessment was framed under Section 153A following a search operation. The assessee contended that additions should be confined to the seized material. However, the AO's investigation extended beyond mere seized documents, incorporating an analysis of the financial transactions and the nature of the companies involved. The Tribunal observed that the AO's reliance on seized documents as corroborative evidence was legitimate and that the assessment under Section 153A was validly framed.

4. Evidentiary Standards and Burden of Proof

The Tribunal emphasized that the burden lies on the assessee to prove the identity, genuineness, and creditworthiness of the shareholders. Mere credit entries in the books are insufficient without supporting evidence. The assessee failed to discharge this burden, especially in light of incriminating seized documents and the absence of any satisfactory explanation or evidence to counter the AO's findings.

5. Precedent and Consistency with Prior Assessment Years

The CIT (Appeals) relied on the consistency principle, noting that the identical issue was decided against the assessee in earlier assessment years. The Tribunal found this approach appropriate, reinforcing the principle that once a question of fact and law is settled in earlier years, it should be followed in subsequent years unless new evidence emerges.

Conclusions on Issues

• The additions under Section 68 relating to share capital and share premium were justified as the assessee failed to prove the identity, genuineness, and creditworthiness of the shareholders.
• The additions under Section 69C for commission expenses incurred in arranging the bogus share capital were valid.
• The assessment under Section 153A was validly framed and the AO's reliance on seized documents was proper.
• The principle of consistency with earlier assessment years was correctly applied by the CIT (Appeals).

Significant Holdings

The Tribunal articulated key legal principles, including the following verbatim excerpt:

"Once the alleged share application money is credited to the accounts of the assessee, then role of Section 68 would come. A perusal of this Section would indicate that basically this Section contemplates three conditions required to be fulfilled by an assessee, namely; (a) Identity of share applicants, (b) Genuineness of the transactions, and (c) Credit worthiness of share applicants."

Further, the Tribunal observed:

"The AO has made a detailed analysis and thereafter found the alleged share application money received by the assessee along with its premium is a bogus one... after taking into consideration the orders of the Revenue Authorities, we do not find any merit in this appeal."

The Tribunal's final determination dismissed the appeal, affirming the additions and confirming that the share capital and premium received were accommodation entries and thus liable to be added to the income under Sections 68 and 69C.