2017 (2) TMI 1302 - AT - Income Tax

Unexplained credit u/s 68 - proof of identity, genuineness of the transaction and creditworthiness of the creditor of the four companies - Held that - Whether investee companies have their own profit making apparatus and were involved in any tangible business activity or were they merely rotated money, which was coming through the bank accounts, which means deposits by way of cash and issue of cheques. Creditworthiness and genuineness of the transaction is therefore not proved by showing merely issue and receipt of a cheque or by furnishing a copy of statement of bank account of share subscriber, when circumstances requires that there should be some more evidence of positive nature to show that the subscribers had made genuine investment. In the present case, the Assessing Officer clearly harbours doubts about the legitimacy of share subscription in the assessee company and has gone about issuing notices under section 133(6), summons under section 131 and calling for the personal attendance of the directors of the investee companies. When the Assessing Officer sets about seeking explanation for the credit entries in the books of account of the assessee in terms of section 68, it is legitimately expected that the exercise would be taken to the logical end. Whilst it does appear that the time given to the assessee company for proving the identity and creditworthiness of the investee companies was too short, the whole exercise started at the fag end of assessment proceedings and further that it is probably not always possible for the assessee placed in such situation to be able to enforce the physical attendance of the Directors who are not in Jaipur, the curtains on such exercise at verification may not be drawn and adverse inferences reached only on the basis of returning undelivered of the summons under section 131. Conversely, with doubts as to the identity, creditworthiness and genuineness of transaction persisting in the minds of the Assessing officer, the initial burden on the assessee cannot be said to be have been discharged. We accordingly set aside the matter to the file of the AO to examine the matter a fresh taking into consideration the legal proposition. Appeal filed by the Revenue is allowed for statistical purposes.

Summary

Issues Involved:
1. Whether the ld. CIT(A) erred in deleting the addition of ? 75,00,000/- on account of unexplained credit u/s 68 of the Income Tax Act.

Detailed Analysis:

1. Facts and Background:
The Assessing Officer (AO) observed that the assessee company received share capital and share premium from four companies: Omega Vincom Trading (P) Ltd., Pranjal Trading Co. (P) Ltd., Melbright Suppliers (P) Ltd., and Gawarja Merchants (P) Ltd. The AO issued notices under section 133(6) and commissions under section 131(1)(d) to verify the genuineness of these transactions. The AO received reports indicating that some companies did not exist at the given addresses or had minimal income, raising doubts about their creditworthiness and the genuineness of the transactions.

2. Assessing Officer's Findings:
The AO concluded that:
- Notices sent to some companies were returned unserved.
- The assessee failed to produce the directors of these companies.
- The companies had minimal income, casting doubt on their creditworthiness.
- The identity, genuineness, and creditworthiness of the companies were not established.
As a result, the AO added ? 75,00,000/- to the income of the assessee under section 68 of the Income Tax Act.

3. Assessee's Arguments:
The assessee contended that:
- The identity of the companies was established through PAN, Income Tax returns, and filings with the Ministry of Corporate Affairs.
- The transactions were genuine as payments were received through banking channels.
- The creditworthiness of the companies was established based on their net worth.
- The assessee provided new addresses for the companies and requested the AO to issue notices to the directors directly.

4. CIT(A)'s Findings:
The CIT(A) deleted the addition, noting that:
- The assessee provided complete details of the share applicants, including PAN and Income Tax returns.
- The transactions were made through banking channels, proving their genuineness.
- The net worth of the companies was significantly higher than the amount invested in the assessee company, establishing their creditworthiness.
- The CIT(A) relied on the decision in M/s ARL Infratech Ltd., where the ITAT held that if the share applicant is identified, the amount cannot be added in the assessee’s hand under section 68.

5. Revenue's Arguments:
The Revenue argued that:
- The AO's findings should be sustained as the assessee failed to prove the identity, genuineness, and creditworthiness of the companies.
- The AO's investigation revealed that some companies did not exist at the given addresses or had minimal income.
- The CIT(A) erred in deleting the addition without proper verification.

6. ITAT's Analysis:
The ITAT referred to various legal authorities and concluded that:
- The primary requirements under section 68 are the identification of the shareholder, creditworthiness of the shareholder, and the genuineness of the transaction.
- The assessee must provide credible and verifiable evidence to discharge the initial burden.
- The AO must conduct a thorough investigation if there are doubts about the legitimacy of the transactions.
- In this case, the AO's doubts about the identity, creditworthiness, and genuineness of the transactions persisted, and the assessee failed to discharge the initial burden.

7. Conclusion:
The ITAT set aside the matter to the file of the AO for fresh examination, considering the legal proposition discussed. The appeal filed by the Revenue was allowed for statistical purposes.

8. Order:
The order was pronounced in the open court on 24/02/2017.