2025 (6) TMI 1902 - AT - Income Tax

Addition u/s 68 - share capital and share premium - accommodation entry receipts - addition made by the AO holding that the assessee has paid the commission @ 1.8% for arranging accommodation entries in the garb of alleged amount of share capital - HELD THAT - Source of funds arising to the group companies to establish the bonafides of receipts by the assessee has not been examined. The issue is factual in nature. Proper finding of facts from the lower authorities would be necessary to apply the correct position of law. CIT(A) has concluded that subscriber is a conduit company. The source of receipt of money by M/s. Udhyam Mercandise Pvt.Ltd. has not been looked into. In the absence of any affirmative finding on the source of funds originating in one company and getting transferred to other company in rotation as claimed we are incapacitated to return any finding either way. Hence without expressing any opinion on merits and in order to prevent miscarriage of justice and to set right the alleged impropriety in the action of the Revenue if any we consider it expedient to set aside the first appellate order and restore the appeal before the CIT(A) for fresh adjudication - Appeal of the assessee is allowed for statistical purposes.

Summary

The core legal questions considered in this judgment revolve around the applicability and interpretation of section 68 of the Income Tax Act, 1961, specifically concerning:

1. Whether the addition of Rs. 2,94,80,000/- credited as share capital and share premium to the assessee's income under section 68 was justified by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Whether the assessee satisfactorily discharged the onus to prove the identity, creditworthiness, and genuineness of the share application money credited by the subscriber company.

3. Whether the addition of Rs. 5,30,640/- made by the AO on account of commission allegedly paid for arranging accommodation entries was justified.

4. The extent to which circumstantial evidence, financial statements, and transaction patterns can be relied upon to determine the genuineness of share capital receipts under section 68.

Issue-wise Detailed Analysis

Issue 1: Justification of Addition under Section 68 on Account of Share Capital and Share Premium

Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act provides that where any sum is found credited in the books of an assessee and the assessee fails to satisfactorily explain the nature and source of such sum, it may be treated as income. The legal burden lies on the assessee to prove the bonafides of the transaction, including the identity, creditworthiness, and genuineness of the creditor or investor. This principle is well established through precedents such as PCIT Vs Youth Construction Pvt Ltd, CIT v. United Commercial and Industrial Co (P.) Ltd, and CIT v. Precision Finance (P.) Ltd. Further, the Supreme Court in cases like CIT v. Durga Prasad More and Sumati Dayal v. CIT emphasized the application of human probabilities and surrounding circumstances in judging the genuineness of transactions.

Court's Interpretation and Reasoning: The AO observed that the assessee received Rs. 2,94,80,000/- by issuing shares at an exorbitant premium (Rs. 258 per share against a face value of Rs. 10) to a subscriber company, M/s Udhyam Merchandise Pvt. Ltd. (UMPL). The AO found that UMPL itself was a conduit entity with minimal genuine business operations, primarily investing in other private limited companies at huge premiums without management control, indicating a lack of commercial rationale. Further, the AO noted a circular flow of funds among group companies (UMPL, Kamdhenu Enterprises Ltd., and the assessee) with common directors and shareholders, suggesting accommodation entries designed to camouflage unaccounted money.

The CIT(A) upheld the AO's findings, emphasizing that the onus was on the assessee to prove genuineness and creditworthiness. The CIT(A) relied on the legal principle that mere submission of documents or confirmations does not discharge this onus if the overall transaction lacks commercial logic or is inconsistent with ground realities. The CIT(A) highlighted the unusual nature of the investment-high premium without management control, lack of transparency about ultimate beneficial ownership, and the absence of any assured returns or liquidity, which defied normal business practices.

Key Evidence and Findings: The financial statements of UMPL revealed nominal profits and disproportionate share capital and premium reserves, with investments largely in other private companies at high premiums. Bank statements showed fund transfers within group companies. The valuation report relied upon by the assessee was found inconsistent, with significant unexplained fluctuations in asset values used to justify the premium. No credible evidence was produced to establish the actual beneficial ownership or genuine business purpose behind these transactions.

Application of Law to Facts: Given the lack of credible explanation and the suspicious pattern of fund movement, the AO and CIT(A) concluded that the share capital and premium amounts were accommodation entries and hence rightly added under section 68. The Tribunal, however, noted that the CIT(A) did not examine the source of funds of UMPL in detail, which was a critical gap.

Treatment of Competing Arguments: The assessee argued that the funds were received from a group company with legitimate profits and that the transactions were intra-group, supported by audited financials, assessment orders of UMPL and Kamdhenu Enterprises Ltd., and bank statements. It contended that no adverse material or investigation report existed and that the AO's addition was based on conjecture. The assessee also cited precedents where intra-group fund movements were accepted when source and creditworthiness were satisfactorily explained.

The Revenue, through the AO and CIT(A), countered that despite these submissions, the overall pattern and commercial logic were lacking, and the entities involved were shell or conduit companies facilitating tax evasion. The Tribunal observed that the CIT(A) did not adequately consider the source of funds of UMPL, which was essential to determine genuineness.

Issue 2: Addition of Commission Paid for Accommodation Entry

The AO made an addition of Rs. 5,30,640/- on the basis that the assessee paid commission at 1.8% for arranging the accommodation entry. The assessee disputed this addition, asserting absence of any evidence. The CIT(A) confirmed the addition. The Tribunal found no fresh evidence from the assessee challenging the AO's finding and upheld the addition as reasonable.

Significant Holdings

"The onus is on the assessee to prove 'bonafides' or genuineness of the share application money credited in his books of accounts."

"It is thus also a settled legal position that the onus of the assessee, of explaining nature and source of credit, does not get discharged merely by filing confirmatory letters, or demonstrating that the transactions are done through the banking channels or even by filing the income tax assessment particulars."

"A shell entity, by itself, is not an illegal entity, but it is their act of abatement of, and being part of, financial manoeuvring to legitimise illicit monies and evade taxes, that takes its actions beyond what is legally permissible."

"The genuineness of the transaction as a whole is thus a very important and critical factor in the examination of explanation of the assessee, as required under section 68."

"It would be a superficial approach to examine the claim of the assessee solely on the basis of documents filed by the assessee and overlook the clear unusual pattern in the documents filed by the assessee and pretend to be oblivious of the ground realities."

"The assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the assessee."

Core Principles Established

1. The burden of proof under section 68 lies squarely on the assessee to establish the identity, creditworthiness, and genuineness of the share capital and premium credited.

2. Genuineness must be assessed not only on documentary evidence but also by considering the commercial rationale, surrounding circumstances, and human probabilities.

3. Transactions involving shell or conduit companies issuing shares at exorbitant premiums without management control or assured returns are inherently suspicious and require detailed scrutiny.

4. Mere intra-group fund movement does not ipso facto negate suspicion, especially if the source of funds of the group entities is not satisfactorily examined.

5. Additions under section 68 can be sustained in absence of credible explanation, even if the transactions are routed through banking channels and supported by documents.

6. Additions based on commission paid for arranging accommodation entries are justified where supported by evidence or reasonable inference.

Final Determinations on Each Issue

Regarding the addition of Rs. 2,94,80,000/- under section 68, the Tribunal found that the first appellate authority (CIT(A)) did not adequately examine the source of funds of the subscriber company UMPL. The factual matrix concerning UMPL's creditworthiness and source of funds was not fully explored. Therefore, the Tribunal set aside the CIT(A) order and remanded the matter for fresh adjudication after giving the assessee a reasonable opportunity to produce relevant evidence regarding the source of funds and genuineness of transactions.

Regarding the addition of Rs. 5,30,640/- as commission paid for accommodation entries, the Tribunal upheld the addition due to lack of any fresh evidence or cogent explanation from the assessee to disprove the AO's findings.

The appeal was thus allowed for statistical purposes, with directions for fresh consideration of the genuineness and source of funds issue in accordance with law and facts.