2019 (3) TMI 695 - AT - Income Tax

Addition u/s 68 - increase in share capital including share premium during the year under consideration - no evidences with regard to creditworthiness or genuineness of the transaction established by the assessee - 10 share applicant companies to whom the notices issued, neither appeared on the stipulated date nor a request for adjournment was filed by those companies - AO also recorded the statement of one Sh Surinder Kumar Arora at the address of M/s Karisma Industry Limited, who stated that said company didn t exist - onus to prove - CIT-A deleted the addition - HELD THAT - As respectfully following the decision of NRA Iron & Steel P. Ltd. 2019 (3) TMI 323 - SUPREME COURT and NDR Promoters Pvt. Ltd. 2019 (1) TMI 1089 - DELHI HIGH COURT we are of the opinion that share applicant entities are paper entities created by some individuals for providing entries to the persons including the assessee, not having tax paid capital for promoting their ventures. As the entries of credit are appearing in the books of the assessee, it was the onus of the assessee to explain satisfactorily the nature and source of those credits. As the assessee failed to discharge its onus of explaining source and nature of the credit received and failed to establish creditworthiness and genuineness of the transaction as required u/s 68 of the Act, the assessee is liable for addition under section 68 of the Act. Accordingly, we reverse the finding of the Ld. CIT(A) on the issue in dispute and confirm the addition in the hands of the assessee in terms of section 68 - Decided in favour of revenue.

Issues Involved:
1. Deletion of the addition of ?4,85,58,000/- made by the AO under Section 68 of the IT Act, 1961.
2. The genuineness and creditworthiness of the share capital and share premium transactions.

Detailed Analysis:

Issue 1: Deletion of Addition under Section 68
The primary issue in this case revolves around the deletion of an addition amounting to ?4,85,58,000/- by the CIT(A), which was initially made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961. The AO had observed an increase in share capital and share premium during the assessment year 2006-07 but found no evidence to establish the creditworthiness or genuineness of the transactions. Consequently, the AO made the addition under Section 68.

The assessee, in response, filed an appeal before the CIT(A) and provided additional evidence, including financial statements, assessment orders, and confirmations from the directors of the shareholding companies. The CIT(A) forwarded these documents to the AO for verification. In the remand proceedings, the AO reported that the notices issued to the share applicant companies were complied with, and the directors confirmed the transactions. However, the AO raised two objections:
1. The amounts were deposited in the shareholders' bank accounts immediately before being advanced to the assessee.
2. The directors produced were current directors and not the ones during the assessment year 2006-07.

Despite these objections, the CIT(A) deleted the addition, stating that the assessee had provided sufficient documents to establish the identity, genuineness, and creditworthiness of the parties. The CIT(A) also noted that the AO did not bring any adverse material to dispute the statements and confirmations given by the directors.

Issue 2: Genuineness and Creditworthiness of Transactions
The Revenue, aggrieved by the CIT(A)'s decision, appealed to the Tribunal. The Departmental Representative (DR) argued that the CIT(A) did not adequately consider the AO's objections and that the documents provided by the assessee did not sufficiently explain the creditworthiness and genuineness of the transactions. The DR pointed out that the shareholder companies had very small incomes and showed a pattern of depositing money in their bank accounts immediately before issuing cheques to the assessee, indicating that these companies were merely conduits for providing accommodation entries.

The Tribunal examined the documents submitted by the assessee, including balance sheets, bank statements, and confirmations from the shareholder companies. It was observed that these companies had minimal income, nominal operational expenses, and a pattern of immediate withdrawal of deposited amounts, which raised doubts about their creditworthiness and the genuineness of the transactions.

The Tribunal referred to various judicial pronouncements, including the Supreme Court's decision in the case of Navodya Castle Pvt. Ltd. vs. CIT, which held that mere identity establishment and payment through banking channels are not sufficient if there are deposits of cash in bank accounts prior to issuing cheques. The Tribunal also cited the Supreme Court's decision in the case of NRA Iron & Steel P. Ltd., emphasizing that the assessee must prove the genuineness of the transaction, the identity of the creditors, and the creditworthiness of the investors.

Based on the detailed analysis of the documents and the judicial precedents, the Tribunal concluded that the share applicant entities were paper entities created for providing accommodation entries. The assessee failed to discharge its onus of explaining the source and nature of the credits and establishing the creditworthiness and genuineness of the transactions as required under Section 68 of the Act. Therefore, the Tribunal reversed the CIT(A)'s decision and confirmed the addition of ?4,85,58,000/- in the hands of the assessee.

Conclusion:
The Tribunal allowed the Revenue's appeal, confirming the addition of ?4,85,58,000/- under Section 68 of the Income Tax Act, 1961, due to the failure of the assessee to establish the creditworthiness and genuineness of the share capital and share premium transactions. The decision was pronounced in the Open Court on 8th March 2019.

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