2019 (8) TMI 1851 - AT - Income Tax

Addition u/s 68 - acceptance of share application money - HELD THAT - Major source of funds of the investor company is reserves and surplus which itself are on account of share premium. The examination of profit loss account of the investor company reveals that turnover of the assessee was only Rs.8,81,675/- and net profit was only Rs.95,000/-. As observe from the balance sheet of the investor company that most of the funds are locked up in, investment and loans and advances. The funds locked up in investment are Rs.89 lakhs whereas funds locked up in loans and advances are to the extent of Rs.2,56,45,000/-. Turnover of the assessee company is quite low as compared to the funds of the company which clearly demonstrates that the investor company is indulging into sham transactions. The investor company has invested in the share capital of the assessee company at a premium of Rs.90 per share. The share application money for a share of Rs.10 has been received by the assessee @ Rs.100 per share. The examination of the audited accounts of the investee company demonstrates that assessee had not carried out any significant activities. The examination of balance sheet of investee company reveals that the funds of the company are in the form of reserves and surplus and share application money and application of funds is in loans and advances. The financials of the investee company does not warrant that it deserves share premium of Rs.90 per share, therefore, all these facts prove that the transactions of share application money is not a genuine transaction. As decided in NRA IRON STEEL PVT. LTD. 2019 (3) TMI 323 - SUPREME COURT assessee is under legal obligation to prove the receipt of share capital/premium to the satisfaction of the Assessing Officer, failure of which, would justify addition of the said amount to the income of the assessee. In the present case, though the assessee has received an amount through banking channel but the analysis of the financial statements of investor company do not warrant any justification for having invested in the investee company at a huge premium of Rs.90 per share, specifically keeping in view the fact that investee company is also not engaged in significant activities. Therefore, in view of the facts and circumstances, the appeal of the assessee is dismissed.

Summary

Issues:
- Addition of Rs.50,00,000 under section 68 of the Income Tax Act on account of acceptance of share application money from M/s Indlon Hosiery Pvt. Ltd.

Analysis:
1. The assessee, engaged in real estate development, received share application money from M/s Indlon Hosiery Pvt. Ltd., leading to a query by the Assessing Officer regarding the investor's identity, genuineness, and creditworthiness. The investor company provided documents like audited balance sheet, income tax return, and PAN details. The Assessing Officer sought the source of investment, to which the assessee responded with relevant documents. Despite this, the Assessing Officer did not agree with the assessee's contentions, prompting an appeal by the assessee.

2. The Ld. AR argued that the investor company's audited accounts showed sufficient funds and genuine investment in the assessee's company. Reference was made to case laws to support the genuineness of the transaction, distinguishing it from previous judgments. The Ld. AR emphasized that all relevant documents proving identity, creditworthiness, and genuineness were submitted, urging the allowance of the appeal.

3. The Ld. DR, however, relied on lower authorities' orders and various case laws, particularly citing the Hon'ble Supreme Court's decision in PCIT vs NRA Iron P. Ltd. The argument was made that the transaction lacked genuineness, and the burden to prove identity, creditworthiness, and genuineness rested on the assessee, which was allegedly not fulfilled due to discrepancies in the investor company's audited accounts.

4. Upon review, it was observed that the investor company's major funds were from reserves and surplus, with significant amounts locked up in investments and loans. The turnover of the assessee was considerably low compared to the funds of the investor company, indicating potential sham transactions. The investor company's investment in the share capital of the assessee at a high premium per share raised doubts about the genuineness of the transaction. Citing the PCIT vs NRA Iron & Steel Pvt. Ltd. case, the Tribunal emphasized the need for careful scrutiny of share capital transactions, especially in private placements, and highlighted the onus on the assessee to establish creditworthiness, which was not adequately proven in this case. Despite the amount being received through banking channels, the financial analysis of the investor company did not justify the substantial premium paid for the shares, leading to the dismissal of the assessee's appeal.

5. Ultimately, the Tribunal dismissed the appeal filed by the assessee, upholding the addition of Rs.50,00,000 under section 68 of the Income Tax Act, emphasizing the lack of justification for the significant premium paid for the shares in question.