2017 (12) TMI 1635 - AT - Income Tax

Addition u/s 68 - share application money received treating it as unexplained - assessee has failed to offer any explanation with regard to the credits found in the nature of share capital and share premium - Held that - All the given evidences go to prove an undoubted fact that these companies are not paper companies and recognized with business activity. The assessee also filed affidavit form the directors of subscriber companies, wherein thy have explained the reasons for not receiving communication sent by the AO u/s 133(6). They further stated in the affidavit that they have subscribed to the share capital of the company and also furnished supporting evidences to justify investment in share capital of the company - The assessee has furnished bank statement of subscribers wherein we do not find any instance of cash deposits or transfer from other companies prior to the date of transfer to the assessee company - AO was incorrect in treating share capital alongwith share application money as unexplained cash credit u/s 68 Coming to the observation of the AO with regard to the issue of shares at a premium merit in the findings of the AO for the reason that the issue of shares at a premium and subscription to such shares is within the knowledge of the company and the subscribers to the share capital and the AO cannot have any role to play as long as the assessee has prove the genuineness of transactions. We further notice that the AO cannot question the issue of shares at a premium and also cannot bring to tax such share premium within the provisions of section 68 of the Act, before insertion of Proviso to section 68 by the Finance Act, 2012 wef 01-04-2013 which evident from the fact that the Hon ble Bombay High Court has held that Proviso inserted to section 68 is retrospective in nature. Therefore, we are of the considered view that the AO has treated share capital and share premium as unexplained credit u/s 68 of the Act, on flimsy grounds ignoring all evidences filed by the assessee. - decided against revenue

Issues Involved:
1. Deletion of addition made on account of share application money received by treating it as unexplained income under Section 68 of the Income Tax Act, 1961.
2. Failure of the assessee to discharge the onus of substantiating the genuineness of transactions and creditworthiness of the investors.
3. Financial position of the investors and the justification for charging a premium on shares.
4. Reliance on the judgment of the Supreme Court in the case of Lovely Exports Pvt. Ltd.
5. Ignoring the ratio laid down by the Bombay High Court in the case of Major Metals Ltd. vs. UOI.
6. Ignoring the ratio laid down by the Delhi High Court in the cases of CIT vs. Nova Promoters & Finlease (Pvt.) Ltd. and CIT vs. NR Portfolio (Pvt.) Ltd.

Detailed Analysis:

1. Deletion of Addition Made on Account of Share Application Money:
The CIT(A) deleted the addition of ?12 crores made by the AO on account of share application money received, treating it as unexplained income under Section 68 of the Income Tax Act, 1961. The CIT(A) observed that the assessee had provided complete documentary evidence to prove the identity of subscribers and the genuineness of transactions, including PAN details, CIN master data, affidavits, and IT acknowledgment receipts. The CIT(A) relied on the Supreme Court judgment in the case of Lovely Exports Pvt. Ltd., which held that if the assessee provides details of the subscribers, the AO should proceed to reopen the assessment of the subscribers if there is any doubt about the genuineness of transactions.

2. Failure to Discharge Onus of Substantiating Genuineness and Creditworthiness:
The AO contended that the assessee failed to discharge the onus of proving the genuineness of transactions and the creditworthiness of the investors. The AO noted that although the identity of the subscribers was established, the genuineness of the transactions and the creditworthiness of the parties were not proved. The AO argued that the companies were paper companies without any business activity and did not have the capacity to subscribe to such a large share capital. However, the CIT(A) and the Tribunal found that the assessee had provided substantial evidence, including bank statements, balance sheets, and affidavits, to prove the genuineness and creditworthiness of the transactions.

3. Financial Position of Investors and Justification for Share Premium:
The AO questioned the financial position of the investors and the justification for charging a premium of ?90 per share with a face value of ?10. The AO argued that the financial position of the assessee did not justify such a high premium. However, the CIT(A) and the Tribunal held that the issue of shares at a premium and the subscription to such shares is within the knowledge of the company and the subscribers. The AO cannot question the share premium as long as the assessee proves the genuineness of transactions. The Tribunal noted that the companies had sufficient reserves and surplus to justify the investment in the assessee company.

4. Reliance on the Judgment of Lovely Exports Pvt. Ltd.:
The CIT(A) relied on the Supreme Court judgment in the case of Lovely Exports Pvt. Ltd., which held that if the share application money is received from alleged bogus shareholders whose names are given to the AO, the department can proceed against them but cannot treat it as undisclosed income of the assessee company. The Tribunal upheld this view, stating that the assessee had provided all necessary details of the subscribers, and the AO should have investigated further if there were doubts about the genuineness of the transactions.

5. Ignoring the Ratio Laid Down by the Bombay High Court in Major Metals Ltd. vs. UOI:
The AO argued that the CIT(A) ignored the ratio laid down by the Bombay High Court in the case of Major Metals Ltd. vs. UOI, where it was held that amounts received as share application money should be taxed as income of the assessee company from undisclosed sources if the genuineness and creditworthiness are not established. However, the Tribunal found that the facts of the present case were different, as the assessee had provided substantial evidence to prove the genuineness and creditworthiness of the transactions.

6. Ignoring the Ratio Laid Down by the Delhi High Court in Nova Promoters & Finlease (Pvt.) Ltd. and NR Portfolio (Pvt.) Ltd.:
The AO also argued that the CIT(A) ignored the ratio laid down by the Delhi High Court in the cases of Nova Promoters & Finlease (Pvt.) Ltd. and NR Portfolio (Pvt.) Ltd., where it was held that amounts shown as share application money should be taxed as undisclosed income if the assessee fails to establish the genuineness and financial capacity of the investors. The Tribunal found that the assessee had provided sufficient evidence to prove the genuineness and creditworthiness of the transactions, distinguishing the present case from the cited judgments.

Conclusion:
The Tribunal upheld the order of the CIT(A), deleting the addition made by the AO towards share capital and share premium under Section 68 of the Income Tax Act, 1961. The Tribunal found that the assessee had provided substantial evidence to prove the identity, genuineness, and creditworthiness of the subscribers. The Tribunal also held that the AO's reasons for treating the share capital as unexplained cash credit were not justified, as the assessee had discharged the burden cast upon it under Section 68. The appeal filed by the revenue was dismissed.

← Previous Next →