2025 (7) TMI 1416 - AT - Income Tax

Unexplained u/s 68 - unexplained source of source of share capital contribution received by the assessee company during the year under consideration - HELD THAT - The assessee has established and satisfied all the three ingredients being identity creditworthiness and genuineness of share capital contribution to explain credit in terms of provisions of section 68 of the Act. The argument of the learned Departmental Representative that the assessee had obligation to explain source of source is unjustified and unsustainable and contrary to law laid down by Hon ble Jurisdictional High Court and has no merit. On the above facts share capital contribution cannot be said to be unexplained credit. As in M/s Ami Industries (India) Pvt. Ltd. 2020 (2) TMI 269 - BOMBAY HIGH COURT as upheld the order of appellate authorities deleting the addition made in respect to share capital contribution. Assessee appeal allowed.

Summary

ISSUES:

Whether the identity, creditworthiness, and genuineness of the corporate shareholder contributing share capital can be considered unexplained under section 68 of the Income Tax Act, 1961, when independent enquiries confirm the transaction.Whether the Assessing Officer can treat share capital contribution as unexplained credit solely based on the creditworthiness of the investing companies being paper companies or having meager income.Whether the assessee is required to explain the "source of source" of the share capital contribution under section 68.Whether the proviso to section 68 of the Act applies retrospectively to assessment years prior to 2013-14.Whether judicial precedents, including decisions of the Hon'ble Supreme Court and various High Courts, support deletion of additions made under section 68 in similar factual scenarios.Whether reliance on the decision of the Hon'ble Delhi High Court in CIT vs. Globus Securities & Finance Pvt. Ltd. is applicable to the facts of the case.

RULINGS / HOLDINGS:

On identity, creditworthiness, and genuineness: The court held that the assessee has discharged its onus by establishing the identity, creditworthiness, and genuineness of the corporate shareholder through submission of PAN, financial statements, bank statements, and confirmation of transactions, thus the addition under section 68 is unjustified and unsustainable.On treatment of share capital contribution as unexplained credit: The court found that mere inquiries revealing that investing companies are paper companies with meager income do not suffice to treat the share capital contribution as unexplained credit when independent enquiries corroborate the transaction.On "source of source": The court reiterated the settled legal position that the assessee is not required to explain the "source of source" of the share capital contribution under section 68 of the Act.On applicability of proviso to section 68: The proviso to section 68 introduced effective from assessment year 2013-14 does not apply retrospectively to the assessment year under consideration; therefore, pre-proviso legal tests apply.On judicial precedents: The court relied on authoritative decisions including CIT vs. Lovely Exports (P) Ltd., CIT vs. Value Capital Services (P) Ltd., and the Hon'ble Bombay High Court in Gagandeep Infrastructure Pvt. Ltd., holding that additions under section 68 without incriminating evidence or failure to discharge onus are not sustainable.On reliance on CIT vs. Globus Securities & Finance Pvt. Ltd.: The court held that the decision is distinguishable on facts and inapplicable to the present case as independent enquiry and corroborative evidence support the genuineness of the share capital contribution.

RATIONALE:

The legal framework applied includes section 68 of the Income Tax Act, 1961, which requires the assessee to prove the identity, creditworthiness, and genuineness of the creditor and transaction for any cash credit appearing in the books.Precedents such as CIT vs. Lovely Exports (P) Ltd. establish that if share application money is received from alleged bogus shareholders, the Revenue must proceed against those shareholders individually rather than adding the amount to the assessee's income.The court emphasized that the proviso to section 68 introduced by the Finance Act 2012 applies only prospectively from assessment year 2013-14 and does not affect prior years.Independent enquiries conducted by the Assessing Officer and corroborated by the Investigation Wing confirming the existence, tax compliance, and financial capacity of the corporate shareholder were given due weight.The court distinguished the facts from cases where investing companies were found to be non-existent or lacking creditworthiness, noting that in the present case no incriminating evidence was found during search or enquiry.The court reaffirmed the settled principle that the assessee is not required to explain the "source of source," and the burden shifts to the Revenue once the assessee establishes identity and genuineness.The court declined to follow the decision of the Hon'ble Delhi High Court in Globus Securities & Finance Pvt. Ltd. as the facts there involved entities engaged in providing accommodation entries, which was not the case here.