2019 (4) TMI 401 - AT - Income Tax

Addition u/s.68 - Securities Premium received from Investors - addition u/s 56(2)(viib) - addition u/s addition as shares were issued at high premium since the financials of the company did not justify issue of shares at high premium - Source of source - HELD THAT - nothing in law prohibits issue of shares at high premium and the assessee had duly complied with statutory requirements as to shares allotment. Importantly, the provisions of Section 56(2)(viib) were not applicable to the assessee since these provisions are inserted by Finance Act, 2012 and are applicable with effect from 01/04/2013 only. The revenue, in our opinion, by questioning the wisdom of the investor, could not make addition in the hands of the assessee as unexplained cash credit u/s 68 unless it was established that the assessee s unaccounted money was routed in the books through the mechanism of fictitious share allotment. Nothing on record demonstrate such exchange of cash between the investor and the assessee. The assessee was incorporated only during the year 2008 and it was in the process of setting up its business operations. Under this scenario, is difficult to infer that the assessee had such huge unaccounted money in its possession which was routed in the accounts through the mechanism of share allotment. The assessee was required to prove the source of the money only and nothing beyond. We find that the assessee has demonstrated the same by filing the requisite documents in this regard to the revenue authorities. Totality of the above factual matrix as well as settled legal position lead us to form a belief that the impugned additions u/s 68, in the hands of the assessee, were not justified. By deleting the same, we allow the appeal of assessee

Issues Involved:
1. Deletion of addition of ?3,59,70,275/- under Section 68 of the Income Tax Act on account of Securities Premium received from Investors.
2. Validity of the reassessment proceedings under Section 147 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68:

The primary issue was whether the addition of ?3,59,70,275/- under Section 68 of the Income Tax Act, 1961, on account of Securities Premium received from investors, was justified. The assessee, a corporate entity engaged in financial and management consultancy, was subjected to reassessment proceedings, resulting in the addition of the said amount as unexplained cash credit.

During the assessment, the assessee justified the share premium by stating that the shares were issued to high net-worth non-resident angel investors based on business projections and a successful existing business model. The assessee provided extensive documentary evidence, including return of allotment of shares, board resolutions, investor lists, annual returns, account confirmations, tax documents of investors, and details of the creditworthiness of investors.

The Assessing Officer (AO) was not satisfied with the justification and opined that the assessee failed to prove the identity, creditworthiness, and genuineness of the transactions as required by Section 68. Consequently, the AO treated the amount as unexplained cash credit and added it to the assessee's income.

On appeal, the CIT(A) upheld the AO's decision, stating that the assessee failed to satisfactorily discharge the onus cast on it by Section 68. The CIT(A) noted that no primary evidence such as confirmation from investors, bank statements, balance sheets, or income tax returns were furnished.

Upon further appeal, the ITAT examined the documents and found that the assessee had indeed provided sufficient evidence to satisfy the three primary conditions under Section 68. The transactions were through banking channels, and the identity, creditworthiness, and genuineness of the investors were established. The ITAT noted that the high premium on shares, while unusual, was justified based on the business model and projections.

The ITAT also referenced the judgment in CIT Vs. Lovely Exports Ltd. [299 ITR 268], which held that if the identity of the investors is established, no addition can be made under Section 68.

2. Validity of Reassessment Proceedings under Section 147:

The second issue was the validity of the reassessment proceedings initiated under Section 147 of the Income Tax Act. The reassessment was triggered by the fact that notices issued under Section 133(6) during the assessment proceedings for AY 2010-11 were returned unserved, leading to the inference that the parties were non-existent.

The ITAT examined the reasons recorded for reopening the assessment and found that the reassessment proceedings were based solely on the non-service of notices in subsequent years, which did not constitute tangible material to infer that income had escaped assessment for AY 2009-10. The ITAT noted that the mere non-service of notices does not automatically lead to an inference of income escapement, especially when no other tangible material was available.

The ITAT also scrutinized the approval process for the reassessment and found that the sanctioning authority had granted approval in a mechanical manner without due application of mind, merely stating "Yes" in the sanction form. This lack of objective satisfaction rendered the reassessment proceedings invalid.

Conclusion:

The ITAT concluded that the reassessment proceedings were not validly initiated and that the addition of ?3,59,70,275/- under Section 68 was not justified. The ITAT allowed the appeal, deleting the addition and invalidating the reassessment proceedings. The appeal was allowed in terms of the above order, and the judgment was pronounced in open court on 03rd January 2019.

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