2017 (12) TMI 1574 - AT - Income Tax

Addition made towards share capital u/s 68 - statements recorded by the DDIT(Inv.) from the directors of the share subscribing companies - Held that - We hold that the allegation of the AO that the assessee had introduced its own funds in the garb of share capital and premium is totally baseless and is only on surmises and conjectures. No evidence or documents were brought on record by the AO to even remotely suggest that the assessee has introduced its own funds in the garb of share capital. Hence we have no hesitation in directing the AO to delete the addition made u/s 68 of the Act towards share capital and share premium in the facts and circumstances of the case. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Justification of addition towards share capital under Section 68 of the Income Tax Act.
2. Validity of the statements recorded during the survey and their retraction.
3. Examination of identity, creditworthiness, and genuineness of the share applicant companies.
4. Evaluation of share premium justification and valuation.
5. Assessment of procedural fairness and opportunity for cross-examination.

Issue-wise Detailed Analysis:

1. Justification of Addition towards Share Capital under Section 68:
The primary issue is whether the addition of ?10,56,00,000 towards share capital under Section 68 of the Income Tax Act was justified. The Assessee, a private limited company engaged in manufacturing coated duplex paper board, received equity share capital with a premium from several shareholders. The Assessing Officer (AO) added this amount as unexplained cash credit under Section 68, which was upheld by the Commissioner of Income Tax (Appeals) (CIT(A)). However, the Tribunal found that the share capital and premium were received from existing shareholders, except for one new shareholder, and the Assessee had submitted all necessary documents to substantiate the transactions.

2. Validity of Statements Recorded During Survey and Their Retraction:
During a survey operation under Section 133A, statements were recorded from directors of the share applicant companies, which were later retracted. The AO relied on these initial statements, which alleged that the share capital was merely accommodation entries. However, these statements were retracted immediately, and affidavits were filed explaining that the statements were made under coercion. The Tribunal noted that the AO did not provide an opportunity for cross-examination and relied on retracted statements without corroborative evidence, which undermined the validity of the addition.

3. Examination of Identity, Creditworthiness, and Genuineness of Share Applicant Companies:
The Assessee provided comprehensive details, including annual accounts, bank statements, ITR acknowledgements, and source of funds certificates from the share applicant companies. The AO had previously accepted similar transactions in the assessment for the Assessment Year (AY) 2013-14 after thorough verification. The Tribunal found no discrepancy in the identity, creditworthiness, and genuineness of the transactions for the AY 2014-15, noting that the same shareholders were involved and the AO had independently verified these details in the previous year.

4. Evaluation of Share Premium Justification and Valuation:
The Assessee issued shares at a premium of ?50 per share, justified by a Chartered Accountant's valuation under Rule 11UA of the Income Tax Rules, which valued the shares at ?67.78. The Tribunal found that the premium was justified based on the Assessee's financial performance and independent valuation. The AO's contention that there was no basis for the premium was rejected as the Assessee had provided a valid valuation report.

5. Assessment of Procedural Fairness and Opportunity for Cross-Examination:
The Tribunal criticized the AO for not providing the Assessee an opportunity to cross-examine the directors who had retracted their statements. The Assessee requested certified copies of the retraction affidavits, which were provided only after the assessment was completed. The Tribunal emphasized the importance of procedural fairness and the need for the AO to consider retractions and provide opportunities for cross-examination, which were not adhered to in this case.

Conclusion:
The Tribunal found that the AO's addition under Section 68 was based on retracted statements without corroborative evidence, and the Assessee had satisfactorily explained the identity, creditworthiness, and genuineness of the share applicants. The share premium was justified by an independent valuation. The Tribunal directed the AO to delete the addition of ?10,56,00,000 towards share capital and share premium, allowing the Assessee's appeal.