2018 (3) TMI 1924 - AT - Income Tax

Unexplained share capital u/s. 68 - Addition based on document found in search - HELD THAT - The first document that is found during the course of search is memorandum of Articles of the investor companies. It is a matter of common knowledge and it is also requirement of the Companies Act that when a company invests in share capital of another company, the investor company should have the clause of authorizing that company to invest in assessee company. It is mandatory that a share application made by the Corporate must be accompanied with the memorandum of articles of the investor company, properly authorized resolution of the investor company as well as other requisite information about the investor company. Such details are needed to be verified by the investee company before making allotment of shares to another company. In view of this, no infirmity can be found in finding such documents with the assessee. Second documents were the bank statements of investor companies. Such bank statements show the bank transactions carried out by the investor companies with the assessee company and for the purpose of justifying the amount of sum received from any party, the responsibility falls on the assessee - bank statements are found from the assessee. Even otherwise, the assessee itself has submitted these bank statements before the AO who would have any doubt about the veracity of the bank statements, he should have issued commission to the Bankers and summons to the directors of these investor companies which have not been done. The bank accounts of the companies, therefore, do not lead to any inference that the investment made by these companies is accommodation entry in the hands of the assessee. The next documents are affidavits of the directors of investor companies, stating that their company has applied for equity shares. This itself is a statement that the investment has been made by those companies. These affidavits were not found either bogus, sworn by different persons other than the directors of the companies nor disclosed anything else other than that declared in the accounts of the companies and these affidavits are, in fact, supporting the transactions. Had there been any transaction recorded on blank share transfer forms, receipts regarding any money or transfer in favour of any person, it would have made them suspicious. The entries in those forms are not at all made, but are merely blank. The assessee has given detailed explanation why they were found at the place of assessee. AO has not examined the signatories of these documents to arrive at the true nature of the transactions. AO is just making an assumption that these are the documents which would have been used by the assessee for transferring those shares in the name of the promoters or their group concerns at a price which is far less than the price of shares issued. It is not the case of the Assessing Officer that either such shares are subsequently transferred at lower price, or such shares stood disposed of by the investor companies. In view of this, the case of the Revenue is merely based on assumption and surmises. If the assessee has explained the nature and source of such income or such credit before the Assessing Officer and the Assessing Officer does not carry out adequate verification, or even after verification, nothing incriminating feature turns out, then it does not throw the onus back on the assessee. In the present case, it was the bounden duty of the Assessing Officer to have enquired from the directors of the investing companies as well as from the bankers of those companies by issue of summons u/s. 131 of the IT Act. Those directors should have been examined to explain about their nature of income and source of such income. They should have been further enquired about the purpose of making investment and fate of their investment as on today. But to utter dismay, the ld. Assessing Officer has slept over the information submitted by the assessee and merely raised assumptions and presumptions. Addition made by AO has become unsustainable in the hands of the assessee due to lack of enquiry or any efforts on the part of the AO. In this regard, we are also constrained to refer the amendment made to the provisions of section 68 of the IT Act by Finance Act, 2012 by inserting a proviso w.e.f. 01.04.2013 that additional burden has been cast on the assessee to prove in the similar circumstances, if no explanation is offered by the investor or such explanation offered by the investor is not satisfactory. We are of the considered opinion that the addition made u/s. 68 in the hands of the assessee cannot be sustained. Addition on account of excess money paid towards purchase of agricultural land - HELD THAT - Admittedly, the assessee surrendered a sum of ₹ 7,50,00,000/- on account of peak investment of diaries seized during the course of search, which stood accepted by the Revenue authorities as business income of assessee. It is also an admitted fact that the actual peak amount worked out to ₹ 7,20,41,208/-. Therefore, the surplus amount of ₹ 29,58,792/-, admittedly, being the business income of the assessee, in our considered opinion, should be deemed to be the source of excess amount paid for purchase of agricultural land and shall take care of it. Hence, there was no need to make separate addition on this account. Accordingly, the addition deserves to be deleted. As a result, the appeal of the assessee is found full of merits and deserves to be allowed.

Issues Involved:
1. Addition on account of purchase of agricultural land.
2. Addition on account of unexplained share capital under Section 68 of the IT Act, 1961.

Issue-wise Detailed Analysis:

1. Addition on Account of Purchase of Agricultural Land:

The assessee challenged the addition of ?5.70 lakhs made by the Assessing Officer (AO) for excess money paid towards the purchase of agricultural land. The AO treated this amount as undisclosed income. The assessee argued that the surplus amount of ?29,58,792, which was part of the surrendered income, should be adjusted against this addition. The Tribunal found merit in the assessee's argument, noting that the surrendered income was accepted as business income by the Revenue authorities. Therefore, the surplus amount should cover the excess payment for the land, rendering a separate addition unnecessary. The Tribunal deleted the addition of ?5.70 lakhs.

2. Addition on Account of Unexplained Share Capital Under Section 68:

The primary issue was the addition of ?5.30 crores for unexplained share capital. The AO noted that the assessee issued equity shares worth ?5.30 crores to 21 companies, charging a premium. During the search, various documents related to these transactions were found, including bank statements and affidavits from the directors of the investor companies. The AO suspected these transactions to be accommodation entries, citing common addresses and directors among the investor companies, and discrepancies in the serial numbers of stamp papers.

The assessee provided extensive documentation to prove the identity, creditworthiness, and genuineness of the transactions, including bank statements, copies of accounts, addresses, PANs, and lists of directors of the investor companies. The AO, however, did not conduct further verification or summon the directors of the investor companies. The Tribunal emphasized that the AO failed to carry out adequate verification and relied on assumptions and presumptions. The Tribunal noted that the assessee had discharged its initial onus by providing sufficient evidence.

The Tribunal also referred to various judicial precedents supporting the assessee's case, including the Supreme Court's decision in CIT vs. Lovely Exports P. Ltd., which held that if the share application money is received from alleged bogus shareholders, the Department can proceed against those shareholders but cannot treat it as undisclosed income of the assessee company. The Tribunal concluded that the addition under Section 68 was unsustainable due to the lack of proper enquiry by the AO and deleted the addition of ?5.30 crores.

Separate Judgments Delivered by Judges:

The Tribunal delivered a consolidated order for all three appeals, addressing the issues raised by different assessees. The findings and conclusions were consistent across the appeals, resulting in the deletion of the additions made by the AO.

Conclusion:

The Tribunal allowed all three appeals, deleting the additions made by the AO for both the purchase of agricultural land and unexplained share capital. The Tribunal emphasized the importance of proper verification and enquiry by the AO and relied on judicial precedents to support its conclusions.

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