2020 (6) TMI 133 - AT - Income Tax

Addition u/s. 68 - bogus share capital and share premium received - onus to prove the identity, creditworthiness and genuineness of the share applicants - HELD THAT - Section 68 provides that if any sum found credited in the year in respect of which the assessee fails to explain the nature and source, it shall be assessed as its undisclosed income. In the facts of the present case, both the nature source of the share application received was fully explained by the assessee. The assessee had discharged its onus to prove the identity, creditworthiness and genuineness of the share applicants. PAN details, bank account statements, audited financial statements and Income Tax acknowledgments were placed on AO's record, including that of the directors and share holders of share subscribing entities as discussed supra. Accordingly all the three conditions as required u/s. 68 i.e. the identity, creditworthiness and genuineness of the transaction was placed before the AO and the onus shifted to AO to disprove the materials placed before him. Without doing so, the addition made by the AO and confirmed by Ld CIT(A) are based on conjectures and surmises, so their impugned action cannot be justified - no addition was warranted under Section 68 of the Act. Therefore, we do allow the appeal of assessee and direct deletion of addition under section 68 - Decided in favour of assessee. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI

Issues Involved:
1. Confirmation of addition of ?16 crores under Section 68 of the Income-tax Act, 1961.
2. Identity, genuineness, and creditworthiness of share applicants.
3. Onus of proof regarding the source of share application money.
4. Justification of share premium valuation.
5. Judicial precedents related to Section 68 of the Act.

Issue-wise Detailed Analysis:

1. Confirmation of Addition under Section 68:
The primary issue is the confirmation of the addition of ?16 crores under Section 68 of the Income-tax Act, 1961, being the share capital and share premium received during the year. The Assessing Officer (AO) added this amount as undisclosed income, alleging that the assessee introduced its undisclosed income in the guise of share application money. The AO's decision was based on the failure of the assessee to produce the directors of the share applicant companies for examination, thereby questioning the authenticity, genuineness, and creditworthiness of the investors.

2. Identity, Genuineness, and Creditworthiness of Share Applicants:
The assessee argued that the share applicants were group companies, and the directors of these companies were close relatives of the directors of the assessee company. The assessee provided extensive documentation, including the audited financials, Income Tax Acknowledgments, computation of income, and bank statements of the share applicant companies. The share applicants, M/s. Set Square Holdings Pvt. Ltd. and M/s. Highlight Goods Pvt. Ltd., had substantial net owned funds and had undergone scrutiny assessments under Section 143(3) of the Act, establishing their identity and creditworthiness. The transactions were made through proper banking channels, and no cash was deposited before the transfer of amounts to the assessee company.

3. Onus of Proof Regarding the Source of Share Application Money:
The assessee contended that it had discharged its onus to prove the identity, creditworthiness, and genuineness of the share subscribers. The AO's insistence on the physical presence of the directors of the share applicant companies was deemed unreasonable, especially when the assessee had provided sufficient documentary evidence. The Tribunal noted that the AO did not pursue further inquiries from the respective AOs of the share subscribers, which was necessary to disprove the documents furnished by the assessee.

4. Justification of Share Premium Valuation:
The assessee justified the premium of ?40 per share by highlighting its substantial turnover and future growth prospects. The Net Asset Value (NAV) of the company prior to the issuance of shares was around ?55 per share, making the premium of ?40 per share reasonable. The Tribunal accepted this justification, noting that the premium was in line with the company's financial performance and future prospects.

5. Judicial Precedents Related to Section 68 of the Act:
The Tribunal referred to several judicial precedents, including the Supreme Court's decision in CIT v. Smt. P. K. Noorjahan and the Calcutta High Court's decisions in Commissioner Of Income Tax vs M/s. Nishan Indo Commerce Ltd and Commissioner of Income Tax vs M/s. Leonard Commercial (P) Ltd. These precedents established that the onus of proving the identity, creditworthiness, and genuineness of the share applicants lies with the assessee. Once the assessee provides sufficient evidence, the burden shifts to the AO to disprove the documents. The Tribunal concluded that the assessee had discharged its onus, and the AO's addition under Section 68 was not justified.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the addition of ?16 crores under Section 68 of the Act. The assessee successfully proved the identity, creditworthiness, and genuineness of the share applicants, and the AO failed to disprove the evidence provided. The decision was based on the principles laid down in various judicial precedents, emphasizing the onus of proof and the necessity of proper inquiries by the AO.

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