2025 (7) TMI 1685 - AT - Income Tax

Addition u/s 68 - bogus Share Capital and Premium in the course of assessment - absence of identity of the Creditors Genuineness and Creditworthiness of the entire transactions - CIT(A) deleted addition - HELD THAT - It was brought to our notice that the directors did not appear and even the Ld. AR failed to produce the directors.There is no evidence of creditworthiness of the subscribers and no evidence for the genuineness of the transaction. CIT(A) was however was carried away by the fact that the directors did not receive the notices therefore they could not appear which however is contrary to the facts mentioned by the Ld. AO in the assessment order as was also pointed out by the Ld. DR before us. Thus the order of the Ld. CIT(A) not being based upon facts of the case and there being no justification for charging huge premium of Rs.90/- on the face value of Rs.10/- per share and the inability to produce the directors for examination but response being received for notices issued u/s 133(6) of the Act all establish the fact that the share capital was arranged by the assessee and therefore despite the directors not appearing the self-serving responses to notices u/s 133(6) of the Act were filed. Thus considering principles laid down in the decision of BST Infratech Ltd. 2024 (4) TMI 989 - CALCUTTA HIGH COURT the failure of the assessee to justify the charging of share premium and no further compliance before us the order of the Ld. CIT(A) is hereby set aside and the order of the Ld. AO is hereby confirmed. Decided in favour of revenue.

Summary

ISSUES:

Whether the identity, creditworthiness, and genuineness of shareholders subscribing to share capital and premium can be accepted without personal attendance or satisfactory verification of the subscribers.Whether the Assessing Officer (AO) is duty bound to investigate the creditworthiness and identity of the creditors/subscribers and to ascertain the genuineness of share capital transactions under Section 68 of the Income Tax Act, 1961.Whether the failure of the assessee to produce directors or provide concrete evidence regarding share capital and premium justifies addition of the amount under Section 68.Whether mere proof of identity of investors and receipt of money through banking channels discharges the onus on the assessee under Section 68.Whether the doctrine of "source of source" or "origin of origin" applies in assessing the genuineness and creditworthiness of investors in share capital subscriptions.Whether circular or round-tripping of funds among group companies to inflate share capital at high premium constitutes non-genuine transactions warranting addition under Section 68.Whether the appellate authority erred in deleting additions made by AO when the assessee failed to discharge the legal obligation under Section 68.Whether delay in filing appeal by the Revenue can be condoned on sufficient cause.

RULINGS / HOLDINGS:

The delay in filing the appeal by the Revenue was condoned as there was a "reasonable and sufficient cause" preventing timely filing.The identity, creditworthiness, and genuineness of the share capital subscribers were not satisfactorily established as the directors did not appear despite summons and the shareholders were found to be "conduit companies" or "name lenders," leading to the conclusion that the share capital was arranged by the assessee and not genuine.The AO was justified in adding the sum of Rs. 15,33,00,000/- under Section 68 as the assessee failed to discharge the onus of proving the genuineness of the transactions and creditworthiness of the investors.Mere proof of identity and receipt of money through banking channels does not discharge the onus under Section 68; the assessee must establish the creditworthiness and genuineness of the transactions.The doctrine of "source of source" or "origin of origin" applies, requiring investigation into the real nature of the transactions, which revealed "round tripping" of funds among group companies to create a façade of genuine investment.The appellate authority erred in deleting the addition as it was "not based upon facts of the case" and ignored the findings of the AO and principles laid down by the High Court in BST Infratech Ltd., which held that circular transactions and lack of creditworthiness justify additions under Section 68.The appeal of the Revenue is allowed, the order of the Commissioner of Income Tax (Appeals) is set aside, and the order of the AO is restored.

RATIONALE:

The legal framework is primarily Section 68 of the Income Tax Act, 1961, which places the burden on the assessee to prove the identity, creditworthiness, and genuineness of share capital subscriptions.Precedents relied upon include the Supreme Court decision in PCIT vs. NRA Iron & Steel Pvt. Ltd. emphasizing the AO's duty to investigate and verify the genuineness of transactions and creditworthiness of subscribers.The High Court's decision in Principal Commissioner of Income-tax (Central)-2 vs. BST Infratech Ltd. was applied, which elaborated on the principles of examining bank statements, tracing the "round tripping" of funds, and applying the doctrine of "source of source" to assess genuineness.The Court emphasized that mere registration of companies with the Registrar of Companies and compliance with banking channels is insufficient to discharge the onus under Section 68 without credible evidence of creditworthiness and genuineness.The failure of directors to appear despite summons under Section 131 and the nature of replies under Section 133(6) were significant in concluding that the transactions were sham and the share capital was not genuine.The Court rejected the appellate authority's reliance on the non-receipt of notices by directors as contrary to the AO's findings of service of summons and non-compliance.This judgment reflects a doctrinal shift emphasizing deeper inquiry into the origin and movement of funds beyond formal compliance, applying the principle of preponderance of probabilities to uphold additions under Section 68 in cases of suspected bogus share capital.