2019 (6) TMI 853 - AT - Income Tax

Addition u/s 68 on account of share capital - assessee failed to prove the creditworthiness of the share holders who have invested in the company - notices under section 131 to the subscribers unserved - HELD THAT - Assessee has filed sufficient documents e.g. Permanent Account Numbers, bank statements, etc. to establish the identities and creditworthiness of the two share applicants. The copies of the bank statements of the share subscribers wherein the transactions are reflected as well as the fact that they are assessed to income tax establish the creditworthiness of the parties concerned while the genuineness of the transaction is borne out by the fact that the transactions were through banking channels. On going through the assessment order, it is seen that the assessing officer has not been able to rebut or find any discrepancy about the documents submitted by the assessee. If that be the case, the Assessing Officer cannot make addition u/s 68 in the hands of the appellant company. In case AO had any doubt about the shareholders, nothing stopped him from taking appropriate action or proceeding against these shareholders. It is a case where the assessee has been able to meet the requirements to justify its case. If the notices issued by the A.O. to the share subscribers were not complied with or came back unserved, this could not be held against the assessee, which had discharged the initial onus which lay upon it by proving the identity of the share applicants and the genuineness of the transactions - Decided in favour of assessee Addition u/s. 14A u/s 8D - no dissatisfaction has been recorded by assessee - HELD THAT - Before invoking the provisions of Section 14A, AO has first of all to record his or her dissatisfaction with the claim of the assessee as regards the expenditure shown (or not shown at all) by the assessee in relation to income which does not form part of the total income. However, in the assessment order, no such dissatisfaction has been recorded and the AO has mechanically applied Section 14A/Rule 8D to make the disallowance, which is not sustainable in the eyes of law. Therefore, addition in dispute is not warranted - CIT(A) has rightly directed the AO to delete the addition - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition of ?6,00,00,000/- made under Section 68 of the Income Tax Act on account of share capital.
2. Deletion of disallowance of ?1,76,513/- made under Section 14A read with Rule 8D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?6,00,00,000/- under Section 68 of the Income Tax Act:

The Revenue challenged the deletion of an addition of ?6,00,00,000/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, citing that the assessee failed to prove the creditworthiness of the shareholders. The AO had issued notices under Section 133(6) to the share applicants, which were returned unserved. Summons under Section 131 to the directors also went uncomplied. One director who appeared was unaware of the transaction details, and the other did not appear. The AO cited decisions from the Delhi High Court in similar cases to support the addition.

The assessee, however, provided copies of replies to notices, bank statements, and PANs of the parties, proving the identity and creditworthiness of the shareholders. The Tribunal noted that there was no adverse information from the Investigation Wing or other sources. The Tribunal referenced the Delhi High Court's decision in CIT vs. Gangeshwari Metal (P) Ltd., distinguishing it from cases where the AO did not conduct proper inquiries and merely rejected the evidence provided by the assessee.

The Tribunal emphasized that the AO should have conducted further inquiries if not convinced by the evidence. The Tribunal also noted that the AO did not bring any material on record to show that the investment came from the assessee's coffers. The Tribunal upheld the CIT(A)'s decision to delete the addition, finding that the assessee had discharged its burden of proof regarding the identity, genuineness, and creditworthiness of the share applicants.

2. Deletion of Disallowance of ?1,76,513/- under Section 14A read with Rule 8D:

The Revenue also contested the deletion of a disallowance of ?1,76,513/- made under Section 14A read with Rule 8D, arguing that the AO correctly applied these provisions to disallow expenses related to exempt income. The assessee contended that it had not earned any dividend income during the year, making Section 14A inapplicable.

The Tribunal noted that the AO must first record dissatisfaction with the assessee's claim regarding the expenditure related to exempt income before invoking Section 14A. In this case, the AO did not record such dissatisfaction and mechanically applied Section 14A/Rule 8D. The Tribunal found this approach unsustainable and upheld the CIT(A)'s decision to delete the disallowance.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s orders to delete both the addition of ?6,00,00,000/- under Section 68 and the disallowance of ?1,76,513/- under Section 14A read with Rule 8D. The Tribunal emphasized the necessity for the AO to conduct proper inquiries and record dissatisfaction before making additions or disallowances under these sections.