2021 (2) TMI 1077 - AT - Income Tax

Addition u/s 68 or 56 - addition of bogus share premium/share capital - as per AO valuation of the share premium charged by the assessee and observed that the provisions of section 56(1)(viib) are not applicable on the alleged transaction - AO not satisfied with the genuineness of the transaction and creditworthiness of the subscribers - HELD THAT - Flow of funds shows that major fund was already lying with the assessee company in the form of loans/advance from partnership firms where the assessee is partners which was refunded to the respective entities and were received back from the share applicants in the form of share application money by the assessee. So there remains no question of doubt about the genuineness of alleged transaction and creditworthiness of the two investor Pvt. Ltd. companies with regard to share capital and share premium received from them during the year. As regards 3rd investor namely Pritesh Jain HUF who has subscribed 93333 equity shares for which it paid ₹ 9,33,330/- towards the share capital and ₹ 60,66,645/- towards share premium as mentioned above, the copy of Income Tax PAN card, copy of income tax return and bank statement reflecting the transaction was furnished. Karta of HUF is relative of Mr. Rajendra Jian who is director in the assessee company. So genuineness of transaction is proved being carried at through banking channel and with a related party who knows the assessee company. As regards the creditworthiness and the source of funds used to make investment tail of fund has been provided in this case. Details of funds leave no scope to doubt the genuineness of creditworthiness of the investor Pritesh Jain, HUF. Assessee has proved the identity of the alleged shareholders and there creditworthiness and has also proved the genuineness of transactions of applying for equity share along with share premium paid thereon. Since both the lower authorities have not found any iota of evidence to disprove the facts filed by the assessee to discredit the documents produced before them as well as before us, no addition was called for u/s 68 of the Act for the alleged amount of equity share capital and share premium received - no reason to interfere in the finding of Ld. CIT(A) and the same stands confirm. Accordingly all the grounds raised by the revenue stands dismissed.

Summary

Issues Involved:
1. Creditworthiness and genuineness of subscriber entities.
2. Creditworthiness and genuineness of the subscriber HUF entity.
3. Applicability of Proviso to Section 68 of the IT Act, 1961.
4. Ignoring landmark decisions of the Apex Court.
5. Validity of assessment order under Section 143(3) of the Act.
6. Nature of share capital and share premium as capital receipts.

Issue-wise Detailed Analysis:

1. Creditworthiness and Genuineness of Subscriber Entities:
The primary issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in adjudicating the creditworthiness and genuineness of transactions involving the subscriber entities. The Assessing Officer (AO) had added ?3,47,01,225/- to the assessee's income under Section 68, questioning the genuineness and creditworthiness of the share capital and premium received from three entities. The CIT(A) found that the assessee provided comprehensive details, including PAN, bank statements, and financial statements of the subscribers, proving their identity and creditworthiness. The CIT(A) concluded that the AO’s addition was unjustified as the transactions were genuine and the subscribers had adequate financial capacity.

2. Creditworthiness and Genuineness of the Subscriber HUF Entity:
The AO also questioned the creditworthiness of the HUF entity, which invested in the assessee company. The CIT(A) found that the HUF entity, represented by a relative of the assessee's director, had sufficient financial resources and provided relevant documents like income tax returns and bank statements. The CIT(A) held that the HUF entity's investment was genuine and its creditworthiness was adequately demonstrated.

3. Applicability of Proviso to Section 68 of the IT Act, 1961:
The AO contended that the explanation of the creditor’s creditworthiness and the genuineness of the transactions must be satisfactory to the AO. The CIT(A) observed that the assessee had not only explained the immediate source but also the source of the source, satisfying the requirements of Section 68. The CIT(A) emphasized that the AO’s suspicion alone, without concrete evidence, could not justify the addition.

4. Ignoring Landmark Decisions of the Apex Court:
The AO alleged that the CIT(A) ignored landmark decisions such as Durga Prasad More, Sumati Dayal, McDowell & Co. Ltd., and NRA Iron & Steel Pvt. Ltd. The CIT(A) distinguished these cases, noting that the facts were different. The CIT(A) referred to various judicial pronouncements supporting the assessee’s case, including the Supreme Court’s decision in Lovely Exports Pvt. Ltd., which held that if the identity of the shareholders is established, no addition can be made under Section 68.

5. Validity of Assessment Order under Section 143(3) of the Act:
The assessee argued that the AO exceeded his jurisdiction by converting limited scrutiny into full scrutiny without prior approval and not following procedural guidelines. The CIT(A) dismissed this ground as academic since the addition under Section 68 was deleted on merits.

6. Nature of Share Capital and Share Premium as Capital Receipts:
The assessee contended that the share capital and premium are capital receipts and cannot be added under Section 68. The CIT(A) agreed, citing judicial precedents that share premium is a capital receipt and cannot be taxed as income. The CIT(A) referred to the Bombay High Court’s decision in Vodafone India Services Pvt. Ltd. and the CBDT’s instructions, which clarified that share premium cannot be treated as income.

Conclusion:
The CIT(A) deleted the addition of ?3,47,01,225/- made by the AO under Section 68, holding that the assessee had satisfactorily proved the identity, creditworthiness, and genuineness of the transactions. The CIT(A) found that the AO’s addition was based on suspicion without concrete evidence. The appeal by the revenue was dismissed, and the cross-objection by the assessee was deemed infructuous. The Tribunal confirmed the CIT(A)’s order, emphasizing that the assessee had discharged its onus under Section 68 and that the AO’s addition was not justified.