2022 (6) TMI 1451 - AT - Income Tax

Unexplained cash credit u/s 68 - onus to prove - share subscription monies received by the assessee alleging that the source of source companies were name lenders having no creditworthiness and the Directors of such companies had not attended the summons - HELD THAT - The phraseology of Section 68 of the Act is clear. The Legislature has laid down that in the absence of a satisfactory explanation the unexplained cash credit may be charged to income tax as the income of the assessee of that previous year. In this case the Legislative mandate is not in terms of the word shall be charged to income-tax as the income of the assessee of that previous year. The Supreme Court while interpreting similar phraseology used in Section 69 of the Act has held that in creating the legal fiction the phraseology used therein employs the word may and not shall . Thus the un-satisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as also held by the Supreme Court in the case of CIT v. Smt. P. K. Noorjahan 1997 (1) TMI 6 - SUPREME COURT Onus to prove - Although the summons issued u/s 131 of the Act remained unserved/non-complied the assessee had furnished all documentary evidences including copies of confirmations PAN Card IT Acknowledgement financial statements and bank statements of all these shareholders. Having regard to these documents and taking into account the judgments rendered in the cases of Ami Industries (I) Pvt. Ltd. 2020 (2) TMI 269 - BOMBAY HIGH COURT and PCIT vs NRA Iron Steel Pvt. Ltd. 2019 (3) TMI 323 - SUPREME COURT the Tribunal held that the assessee had discharged its primary onus of establishing the identity of the investors proving their creditworthiness and establishing the genuineness of the transactions - thus we thus hold that the assessee had discharged the burden cast upon it under the substantive Section 68 of the Act. Whether the additional burden cast upon the assessee under proviso to Section 68 of the Act was discharged or not? - CIT(A) had examined the details and documents concerning RGIL and thereafter arrived at a conclusion that the source of source viz. RGIL was an actual and existing company which was engaged in active business of import and export having substantial turnover and overdraft facilities packing credit etc. from the Bank. Hence with regard to the amounts mentioned in Column (B) above the Ld. CIT(A) found that the source of source of this share capital originated from the coffers of RGIL which had paid these amounts to the shareholders from its Overdraft/Packing Credit Accounts or proceeds received from sale of goods or maturity of fixed deposits; and therefore the Ld. CIT(A) held that these amounts could not be treated as unexplained monies of the assessee company which we concur on the basis of the uncontroverted facts as noted by Ld. CIT(A). Before us the Ld. CIT-DR was unable to point out any infirmity in these findings of facts as decided by the Ld. CIT(A) and therefore we do not see any reason to interfere with the order of the Ld. CIT(A) deleting addition made u/s 68 Partly. Balance amount mentioned in Column (C) of the above Table the Ld. CIT(A) had held that the bodies corporate from whom the shareholders had received monies out of which they had subscribed to the share capital of the assessee were paper companies engaged in the business of providing accommodation entries - The general yardstick adopted by the Ld. CIT(A) across all the twelve (12) shareholders mentioned in Column (C) above was that the source of source of the remaining sum also received from two group entities did not emanate from the coffers of RGIL but was received from unrelated bodies corporate and therefore he treated it to be bogus alleging the source of source to be paper companies is found to be on erroneous assumption/basis in as much as it is found to be not based on any material or evidence. As we have noted earlier in Paras 15(i) to (xvi) above the documents placed on record evidenced the source of source of the investment made by the share subscribers in the assessee s share capital viz. the PAN Certificate of Incorporation bank statements of the source of source etc. It is thus noted that source of money from which these share subscribers could subscribe in assessee was clearly discernible. AR has therefore rightly pointed out that the assessee had discharged its initial burden of substantiating the source of source of funds and no specific infirmity had been pointed out therein by the lower authorities. At the time of hearing even the Ld. CIT-DR was unable to pin-point any defect in these evidences placed on record in support of source of source of funds in the paper book. After the assessee had discharged its burden by furnishing the above documents in support of the source of source of funds in compliance with proviso to Section 68 of the Act then the onus of disproving or finding defects in these documents shifted to the Revenue. It was then the duty of the Revenue to bring on record cogent material/evidence which would show that the source of source of funds was unreliable or not genuine which we find has not been done by them. CIT(A) could not have abdicated from his duty if he harbored a suspicion that what was apparent was not real. It is further noted that the Ld. CIT(A) was unable to point out any defect in the documents furnished by the assessee to discharge the burden to prove the source of source as required as per proviso to Section 68 of the Act and that of the shareholders. Therefore his conclusion that the source of source of funds qua Rs. 6, 22, 05, 000/- were unexplained or represented unaccounted monies of the assessee cannot be sustained Thus unable to find any fault in the conduct of the assessee who had not only discharged its burden of substantiating the identity genuineness and creditworthiness of the shareholders but also the source of source of funds in accordance with proviso to Section 68 of the Act. Thereafter it was for the Revenue to bring on record cogent/credible evidence to show that the evidences/material furnished by assessee in support of nature source and even the source of source of funds of share subscribers were defective/colourable. We however note that the lower authorities failed to undertake any such exercise except for casting aspirations by airing their suspicion based on conjectures and surmises. Hence as the source of source is found to be flowing through regular banking channel from various remittances by corporate entities in the course of their business dealings the additional burden laid upon the assessee/share-subscribers under the proviso to section 68 of the Act is held to have been discharged/satisfied. Decided in favour of assessee. Addition u/s 56(2)(viib) - valuation methodology - assessee had furnished a valuation report from a Chartered Accountant as per which value per share was Rs. 51, 135/- and as per assessee since the premium of Rs. 49, 900/- was lower than the FMV no addition was warranted u/s 56(2)(viib) - whether the AO could have legally rejected the valuation methodology followed by the assessee and changed it to some other method? - HELD THAT - The option to choose the valuation method is with the issuer company and there is no enabling provision empowering the AO to reject and change the valuation method adopted by a company. Having held so it is necessary to clarify that the AO however can indeed verify the manner of application of the valuation method pursued by the issuer company and point out any mistakes errors or infirmities therein. In the present case at hand the Ld. CIT-DR was unable to point out any mistake in the manner of application of valuation method followed by the Chartered Accountant. We thus countenance the action of the Ld. CIT(A) in disagreeing with the action of the AO and upholding the valuation method followed by the assessee and thereby deleting the protective addition made by the AO u/s 56(2)(viib) of the Act. Where the assessee adopts a certain valuation methodology under the Act and rules thereunder the AO cannot subsequently change the valuation method adopted by the assessee. See Vodafone M-Pesa Ltd. v. Principal Commissioner of Income Tax 2018 (3) TMI 530 - BOMBAY HIGH COURT Advances/deposits received by the assessee - The facts available on record shows that the first source of the entire deposits/advances had been established in as much as the identity of the lenders their creditworthiness and genuineness of the transaction was proved by the assessee as per the requirement of law as discussed. Hence if the Ld. CIT(A) doubted the respective sources of these creditors i.e. to extent of Rs. 79, 00, 000/- then the correct course of action was to proceed against the creditors rather than the assessee because the assessee has discharged the burden as required by law section 68 of the Act and the assessee cannot be expected to do more than what the law prescribed -the assessee was not required as per the law in force at that time to explain the source of monies of the creditors. Consequently the basis on which the addition was sustained partly u/s 68 of the Act by Ld. CIT(A) is held to be unsustainable. As decided in Rohini Builders 2001 (3) TMI 9 - GUJARAT HIGH COURT wherein the Court has held that onus of the assessee (in whose books of account credit appears) stands fully discharged if the identity of the creditor is established and actual receipt of money from such creditor is proved. In case the Assessing Officer is dissatisfied about the source of cash deposited in the bank accounts of the creditors the proper course would be to assess such credit in the hands of the creditor (after making due enquiries from such creditor). When when full particulars inclusive of the confirmation with name address PAN IT returns balance sheet profit and loss account in respect of all the lenders were furnished and that it has been found that the loans were received through cheques then the AO was not justified in making addition u/s 68 - See Apex Therm Packaging (P) Ltd. 2013 (12) TMI 1541 - GUJARAT HIGH COURT We are of the considered view that the addition made by the AO u/s 68 of the Act was untenable both in law and on facts. Assessee appeal allowed.

Summary

Issues Involved:
1. Addition of share application money under Section 68 of the Income Tax Act.
2. Addition of share premium under Section 56(2)(viib) of the Income Tax Act.
3. Addition of deposits received as unsecured loans under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of Share Application Money under Section 68 of the Income Tax Act:
The primary issue was whether the addition of Rs. 13,13,50,000/- received as share application money could be justified under Section 68 of the Income Tax Act. The assessee received this amount from 16 corporate entities at a premium of Rs. 49,900/- per share. The Assessing Officer (AO) questioned the creditworthiness and genuineness of these transactions, despite the assessee providing extensive documentation, including PAN details, financial statements, and bank statements of the shareholders. The AO relied on a commission report from DDIT(Inv), Kolkata, which stated that these shareholders were not found at their given addresses and were linked to entry operators.

The CIT(A) divided the share subscription money into two parts:
- Rs. 6,91,45,000/- whose source was traced to the flagship company of the group, Rika Global Impex Ltd (RGIL), and found genuine.
- Rs. 6,22,05,000/- whose source was from other bodies corporate and deemed bogus.

The Tribunal held that the assessee had discharged its initial onus under Section 68 by providing sufficient documentation to establish the identity, creditworthiness, and genuineness of the transactions. The Tribunal also found the commission report unreliable due to inconsistencies and lack of evidence. Therefore, the addition of Rs. 6,22,05,000/- was deleted, and the order of CIT(A) deleting Rs. 6,91,45,000/- was upheld.

2. Addition of Share Premium under Section 56(2)(viib) of the Income Tax Act:
The AO made a protective addition of Rs. 13,10,87,000/- under Section 56(2)(viib), arguing that the premium of Rs. 49,900/- per share was excessive. The CIT(A) deleted this addition, and the Tribunal upheld this decision. The Tribunal noted that the assessee had the option to choose the valuation method, and the Chartered Accountant's valuation report, which followed the Discounted Cash Flow (DCF) method, was in compliance with the law. The AO's attempt to change the valuation method was not supported by any provision allowing such an action. Therefore, the protective addition under Section 56(2)(viib) was deemed unjustified.

3. Addition of Deposits Received as Unsecured Loans under Section 68 of the Income Tax Act:
The AO added Rs. 21,86,50,000/- received as deposits/advances from seven group companies under Section 68, questioning their creditworthiness. The CIT(A) divided these deposits into two parts:
- Rs. 21,07,50,000/- whose source was traced to RGIL and deemed genuine.
- Rs. 79,00,000/- from Dhanlakshmi Tie-up Pvt Ltd, whose source was deemed unproven.

The Tribunal held that the additional burden of proving the "source of source" under Section 68, as imposed by the CIT(A), was not mandated by law. The assessee had sufficiently established the identity, creditworthiness, and genuineness of the lenders. The Tribunal upheld the deletion of Rs. 21,07,50,000/- and directed the deletion of the remaining Rs. 79,00,000/-.

Conclusion:
The Tribunal concluded that the assessee had satisfactorily discharged its onus under Section 68 and Section 56(2)(viib) of the Income Tax Act. The additions made by the AO were found to be unjustified, and the CIT(A)'s partial relief was upheld with further relief granted by the Tribunal. The appeals of the Revenue were dismissed, and the assessee's appeals were allowed.