2016 (5) TMI 1388 - AT - Income Tax

Addition u/s 68 - unexplained cash credit - proof of genuine deposits - discharge of burden of proof - Held that - On a careful consideration of the documents filed by the assessee and the explanations given by it, and without reference to evidences in the form of statement recorded from Shri S.K. Jain or the material seized by the investigation wing to the extent used against the assessee, we hold that the assessee has not discharged the burden of proof that lay out on it, to prove the genuineness of these cash credits as well as the creditworthiness of the share applicant companies. In view of the above discussions, the addition made by the AO u/s 68 of the Act is upheld and the order of the Ld. CIT(A) is vacated. - Decided against assessee.

Summary

Issues Involved:
1. Addition of share capital and share premium under Section 68 of the Income Tax Act, 1961.
2. Deletion of penalty under Section 271(1)(c) of the Income Tax Act, 1961.

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

The assessee, a private limited company engaged in investment and finance, filed a return declaring a loss, which was later reopened under Section 147. The Assessing Officer (AO) made an addition of ?1,64,80,335/- on account of unexplained introduction of share capital and share premium under Section 68. The CIT(A) initially dismissed the appeal but later, following ITAT's directions for a fresh examination, deleted the addition. The revenue appealed against this deletion.

The AO's reasons for the addition included:
- Allegations of entries arranged by Mr. S.K. Jain, whose modus operandi of converting unaccounted money into accounted money was unearthed during a search.
- The assessee's lack of financial base and real business activity, and failure to explain the high premium on shares.
- Non-response to summons by the Bank Manager of Standard Chartered Bank, where shareholders had accounts.
- Reliance on legal precedents, asserting that mere confirmation letters did not discharge the onus of proving the source of investment.

The CIT(A) deleted the addition, stating:
- The AO did not confront the assessee with Mr. S.K. Jain's statement or the seized material, nor provided an opportunity for cross-examination.
- The assessee provided sufficient evidence, including confirmation letters, balance sheets, and income tax assessments of the shareholder companies.
- The non-production of directors for examination was not a valid reason for addition, as the assessee had discharged its primary onus.

The ITAT, considering the revenue's appeal, held:
- The AO should have confronted the assessee with the statement of Mr. S.K. Jain and the seized material.
- The assessee failed to explain the rationale behind the high share premium, especially when shares were allotted at par value shortly before.
- The genuineness of the transactions and the creditworthiness of the shareholders were not satisfactorily demonstrated.
- The appellate authorities have an obligation to ensure proper inquiry and cannot simply delete the addition on procedural grounds.

The ITAT concluded that the assessee did not discharge the burden of proof regarding the genuineness of the cash credits and the creditworthiness of the shareholders. The addition made by the AO under Section 68 was upheld, and the CIT(A)'s order was vacated.

Issue 2: Deletion of Penalty under Section 271(1)(c)

The CIT(A) had quashed the penalty under Section 271(1)(c) on the ground that the addition on merits was deleted. However, since the ITAT upheld the addition under Section 68, the basis for quashing the penalty no longer stood. Therefore, the deletion of the penalty was not justified.

Conclusion:

The ITAT allowed the revenue's appeals, restoring the AO's order and upholding the addition of ?1,64,80,335/- under Section 68. The deletion of the penalty under Section 271(1)(c) was also reversed. The judgment emphasized the necessity for thorough inquiry and proper substantiation of claims regarding share capital and premium transactions.