2019 (9) TMI 689 - AT - Income Tax

Addition on account of share capital money received u/s. 68 - as alleged assessee has failed to offer any explanation with regard to credit found in the nature of share capital - HELD THAT - In the case of PCIT vs. Hi-Tech Residency Pvt. Ltd. 2018 (7) TMI 1347 - SC ORDER has considered identical issue and held that where an assessee company had discharged the onus of establishing identity, genuineness of transaction and creditworthiness of investors, no additions could be made u/s. 68. We, further, noted that although the Apex Court has not expressed any opinion, because of dismissal of SLP filed by the assessee, the fact of the matter is that this issue has been considered in the case of CIT vs. Lovely Exports (P) Ltd 2008 (1) TMI 575 - SC ORDER where the issue has been thoroughly examined in the light of provisions of section 68 of the Act, and held that if the share application money is received by the assessee company from alleged bogus share holders, whose names are given to the AO, then the department is free to proceed to reopen their assessment in accordance with law, but sum received from share holders cannot be regarded as undisclosed income of the assessee. Assessee has discharged its initial onus to prove identity, genuineness of transactions and creditworthiness of the parties by filing various documents. AO, without carrying out further inquiries in order to ascertain the claim of the assessee, jumped into conclusion on the basis of financial statements of the subscribers that none of them had enough source of income to establish creditworthiness. AO and the CIT(A) erred in making additions towards share capital received from seven subscribers u/s. 68 of the I.T. Act, 1961. Hence, we direct the AO to delete the additions made towards share capital u/s. 68 Addition towards non-existing liability u/s. 41(1) - HELD THAT - AO erred in making addition towards creditors u/s. 41(1) of the Act, unless he brought out any material to the effect that such liability has been in fact ceased to exist during the relevant financial year. However, it is not clear whether the details with regard to payment of such liabilities /written back in subsequent years were before the AO or not. Therefore, for the limited purpose of verification of the facts with regard to payment of such liabilities and also written off such liabilities in subsequent financial year and offered to tax, we set aside the issue to the file of the AO and direct him to make necessary inquiries and allow relief in terms of our discussion hereinabove.

Summary

Issues Involved:
1. Addition of share capital money under Section 68 of the Income Tax Act, 1961.
2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.
3. Addition of non-existing liabilities under Section 41(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Share Capital Money under Section 68:
The assessee companies received share application money from multiple subscribers, which was added as unexplained income by the Assessing Officer (AO) under Section 68. The AO concluded that the assessee failed to prove the identity, genuineness, and creditworthiness of the subscribers, despite the assessee providing various documents like PAN, financial statements, and confirmations. The CIT(A) upheld this addition, emphasizing the lack of substantial income or business activity of the subscribers, indicating them as shell companies. The Tribunal, however, found that the assessee had discharged its onus by providing sufficient evidence, including income tax returns and bank statements of the subscribers. The Tribunal noted that the AO did not conduct further inquiries or issue notices under Sections 133(6) or 131 to verify the transactions. Hence, the Tribunal directed the deletion of the additions, emphasizing that the AO failed to prove the credit as income from undisclosed sources.

2. Applicability of Section 56(2)(viib):
The AO also invoked Section 56(2)(viib) to tax the share premium received by the assessee. The CIT(A) upheld this, stating that from A.Y. 2012-13 onwards, any receipt without consideration is taxable. The Tribunal, however, clarified that the provision applies from A.Y. 2013-14 onwards, as per the Finance Act, 2012. Since the assessee provided a valuation report justifying the share premium, the Tribunal ruled that Section 56(2)(viib) was not applicable for the year under consideration, directing the deletion of the related additions.

3. Addition of Non-Existing Liabilities under Section 41(1):
The AO added certain liabilities as income under Section 41(1), considering them as non-existing due to their long-standing nature without any transactions. The CIT(A) upheld the AO’s decision, citing the lack of evidence for the existence of these liabilities. The Tribunal, however, found that the assessee had provided evidence showing that part of the liabilities were paid in subsequent years and the remaining were written off and offered for tax in later years. The Tribunal emphasized that for a liability to be taxed under Section 41(1), there must be a remission or cessation of liability, which was not the case here. Hence, the Tribunal directed the AO to verify the payments and write-offs in subsequent years and allow relief accordingly.

Conclusion:
The Tribunal allowed the appeals related to the addition of share capital money and the applicability of Section 56(2)(viib), directing the deletion of the additions. For the issue of non-existing liabilities under Section 41(1), the Tribunal remanded the matter back to the AO for verification of subsequent payments and write-offs, allowing the appeal partly for statistical purposes.