2017 (9) TMI 665 - HC - Income Tax

Assessment of share capital contributions as unexplained credit/ investment - addition u/s 68/69 - proof of discharging of initial burden/onus - Held that - So long as the proof and identity of the investor and the payment received from him is through a doubtless channel like that of a banking channel, the receipt in the hands of the assessee towards share capital or share premium does not change its colour. The money so invested in the assessee company would still be the money available and belonging to the investors. The consistent principle followed is that the investors sources and credit worthiness cannot be explained by the assessee. If the Department has a doubt about the genuineness of the investors capacity, it is open to it to proceed against those investors. Without taking such a course of action, the Assessing Officer and the Tribunal are proceeding on conjectures that the assessee has, in fact, ploughed back the money. The very approach of the Assessing Officer and the Tribunal are completely opposed to settled legal principles enunciated and they have arrived at conclusions contrary to the legal principles on the subject. Further, they are finding fault with the assessee for the alleged failure of it s investors in proving beyond doubt that they have the capacity to invest at the moment they did in the assessee company. That is clearly a perverse view, as the assessing officer is not expected to perform a near impossibility. The assessee cannot call upon its investors to disclose all such business transactions thay carried on in the immediate past and as to how much they made from their respective business enterprises. The assessee cannot also call upon its investors to prove their good business sense in investing in the assessee company, as such investors cannot gain any controlling stake. - Decided in favour of the assessee and against the Revenue

Issues Involved:
1. Assessment of share capital contributions as unexplained credit/investment under Section 68/69 of the Income Tax Act.
2. Disallowance of expenses incurred on gifts and compliments under Section 37(1) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Assessment of Share Capital Contributions:

Background:
The assessee, a company engaged in the gold and jewelry business, raised share capital of ?21,96,60,000 from four investors. The assessment was scrutinized, leading to a survey under Section 133A. During the survey, two gold purchase vouchers totaling ?4.90 crores were scrutinized, and the Assessing Officer (AO) issued summons to the concerned purchaser, who initially denied the transactions but later provided details.

Assessing Officer's Findings:
The AO rejected the explanation provided by the assessee, suspecting cycling and re-cycling of funds. The AO disallowed the investments, treating them as income, despite the transactions being through banking channels. The AO's suspicion was based on the perceived lack of convincing evidence regarding the sources of the investors' funds.

Commissioner of Income Tax (Appeals) [CIT (A)]:
The CIT (A) found that the investors were identified, and transactions were through banking channels, concluding that the assessee had discharged the onus under Section 68. The CIT (A) deleted the addition of ?21,96,60,000 from the assessee's income.

Income Tax Appellate Tribunal (ITAT):
The ITAT reversed the CIT (A)'s decision, emphasizing that the transactions through banking channels alone did not conclusively prove genuineness. The ITAT questioned the commercial wisdom of the investors and the premium paid for the shares, concluding that the investments were not satisfactorily explained.

High Court's Analysis:
The High Court referred to several Supreme Court judgments, emphasizing that the burden initially lies on the assessee to explain the nature and source of the credited sums. The Court noted that the AO and ITAT acted on suspicion rather than concrete evidence, which is not a substitute for proof. The Court highlighted that once the identity of the investors and the receipt of funds through banking channels are established, the burden shifts to the Department to disprove the genuineness of the transactions. The Court concluded that the AO and ITAT's approach was perverse and contrary to settled legal principles.

Judgment:
The High Court ruled in favor of the assessee, stating that the questions of law framed in TCA.No.435 of 2013 are answered in favor of the assessee and against the Revenue. Consequently, TCA.No.435 of 2013 was allowed.

2. Disallowance of Expenses on Gifts and Compliments:

Background:
The AO disallowed ?10,45,913 claimed by the assessee as expenses for gifts and compliments, citing a lack of supporting evidence. The CIT (A) upheld this disallowance.

Income Tax Appellate Tribunal (ITAT):
The ITAT rejected the assessee's appeal, noting that the assessee failed to produce vouchers for the claimed expenses, despite having the opportunity to secure copies of the impounded vouchers.

High Court's Analysis:
The High Court agreed with the ITAT's finding, emphasizing that the failure to produce evidence justified the disallowance of the claimed expenditure. The Court noted that the turnover of ?150 crores does not prove the actual expenditure claimed.

Judgment:
The High Court ruled in favor of the Revenue, stating that the question of law framed in TCA.No.436 of 2013 is answered in favor of the Revenue and against the assessee. Consequently, TCA.No.436 of 2013 was dismissed with costs.

Final Orders:
The High Court ordered that the sum of ?4 crores already remitted by the appellant company be adjusted towards any other dues for subsequent assessment years.

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