2017 (10) TMI 594 - AT - Income Tax

Addition u/s 68 - unexplained cash credit - explanation to share capital and share premium receipts - Held that - It is settled principle of law that for explaining any cash credit in the books of accounts of an assessee, the assessee is required to explain the identity and creditworthiness of the creditor and the genuineness of the transactions. In the instant case, the assessee has given certain details which according to the lower authorities are not sufficient to explain the share capital and share premium of ₹ 65 crores received by the assessee. In our opinion, the matter requires a re-visit to the file of the Assessing Officer with a direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction regarding the capacity of the two companies to purchase such shares and the genuineness of the transactions. Assessing Officer has calculated the fair market value of the shares of the assessee company at ₹ 35.76 per share and, therefore, he could not have rejected the entire share application money received by the assessee at the premium of ₹ 990/- per share. Thus the matter requires a re-visit to the file of the Assessing Officer with a direction to give one more opportunity to the assessee to substantiate its case with evidence and the Assessing Officer is directed to decide the issue afresh as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes.

Issues Involved:
1. Validity of the addition of ?65,00,00,000 under Section 68 of the Income Tax Act.
2. Establishment of the creditworthiness of the share applicants.
3. Applicability of the amended provisions of Section 68 and Section 56(2)(viib) for the assessment year 2012-13.
4. Application of the Peak Credit Theory.

Detailed Analysis:

1. Validity of the Addition under Section 68:
The core issue revolves around the addition of ?65,00,00,000 made by the Assessing Officer (AO) under Section 68 of the Income Tax Act. The AO observed that the assessee company received share application money and premium amounting to ?65,00,00,000 from two companies, Aman Finvest (P) Ltd. and Supreme Portfolio (P) Ltd. The AO questioned the genuineness of these transactions, noting that the funds were immediately reinvested in the same companies, suggesting a circular flow of money. The AO concluded that these transactions were accommodation entries designed to evade tax, leading to the addition under Section 68.

2. Establishment of Creditworthiness:
The AO and CIT(A) both held that the assessee failed to establish the creditworthiness of the share applicants. The AO's analysis revealed that the investor companies did not have substantial business activities and primarily earned income from dividends and interest. This lack of substantial business activity led the AO to question their ability to invest such large amounts in the assessee company. The CIT(A) supported this view, noting that the transactions were circular and lacked genuine business purposes.

3. Applicability of Amended Provisions:
The assessee argued that the provisions of Section 68 and Section 56(2)(viib), which were amended to address unexplained share capital and premium, were applicable from assessment year 2013-14 onwards. Since the assessment year in question was 2012-13, these provisions should not apply. The CIT(A) and AO, however, did not explicitly address this argument, focusing instead on the genuineness and creditworthiness of the transactions.

4. Application of Peak Credit Theory:
The assessee alternatively argued for the application of the Peak Credit Theory, suggesting that at least the initial loan amount of ?7.5 crore, which was received through banking channels and whose source was explained, should be accepted. The CIT(A) rejected this argument, stating that the facts did not mandate its application as the amounts received were shown as share capital, which were proved to be non-genuine.

Tribunal's Decision:
The Tribunal considered the arguments and evidence presented by both sides. It noted that the assessee had provided certain details but failed to fully satisfy the AO and CIT(A) regarding the genuineness and creditworthiness of the transactions. The Tribunal directed a re-examination of the case by the AO, allowing the assessee another opportunity to substantiate its claims with adequate evidence. The AO was instructed to reconsider the fair market value of the shares and decide the issue afresh, ensuring due opportunity for the assessee to present its case.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remanding the case back to the AO for a fresh assessment. This decision underscores the importance of providing clear and convincing evidence to establish the genuineness and creditworthiness of transactions involving large sums of money.

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