2021 (9) TMI 1124 - AT - Income Tax

Addition u/s 68 - unexplained credit - addition of share application money received - validity of explanation of the assessee with respect to these credits - CIT-A deleted the addition - onus to prove 'bonafides' or 'genuineness' of the share application money credited in his books of accounts - HELD THAT - The assessee is engaged in the business of trading in electrical wires and cables , and, at the other place, it is mentioned that the assessee company is engaged in the process of obtaining dealership of polycab wires and cables and that the assessee company is engaged in the business of investments and that there is no material change in the nature of business of company - In an earlier year s scrutiny assessment order, it is stated that the assessee is engaged in the business of trading- others - Undoubtedly, these statements are made in the scrutiny assessment orders for three different assessment years but it shows fluctuating stand of the assessee even with respect to the business the assessee was engaged in. There is not even whisper of an idea about who are the persons behind RVPL and other associated companies constituting this complex web of companies, in different tiers, and transferring monies from one company to another manner in almost a mechanical manner. There is complete opacity so far as the individuals behind this funding and the complex web of companies are concerned. The entities involved in the transactions only provide different layers to the transaction and de facto hide the true investor. Lets not forget that the investments are in private companies, these investments are substantial vis- -vis the size of the companies, are at huge premiums and without any management participation in the entities in which investments are made. These features are, by any standard, most unusual in real life business situations- and more so, as we will see a little later, when justifications for share premium are absolutely untenable. Buying shares at a huge premium (900% of the face value) in as much as over 10% of the equity capital in nondescript small private limited companies, without a share in management and control, is something extremely unusual unless the investor is very well known or close associate of the company in which investment is being made. As we have noted earlier, the assessee has no clue about the actual beneficial investor in his company. here are tiers after tiers of the companies and there is nothing to show light on the actual owners. Once again, the shares are issued at premium that too in a company which has no other activity except for routing the funds to another company, i.e. the assessee, by making investments therein at a huge premium. That defies logic, and such transactions donot take place in the real life world. The assessee company is stated to be not connected with Rohini Vyapar Pvt Ltd in any manner, and yet the share subscriber had such a faith in the assessee company that it subscribed to the shares at 900% premium. That is something quite unusual. Except for a capital investment of ₹ 8 crores in the financial year 2010-11, no increase in investments is provided for. It is also not clear as to on what basis does the valuer come to the conclusion that only additional investment required by the company is ₹ 8 crores. By any standard these are very optimistic computations particularly when the shareholder has no control in the company even though its shareholding is 10%. The investment so made, in the usual course of business, does not make any sense at all. The share premium, at which the shares are issued, is wholly unrealistic. The valuation report submitted before us does not inspire any faith and even a simple cross reference to the financial statements of the assessee company would show that cash inflows are exaggerated by 13,000% and then discounted accordingly. The assumption in the valuation report are unrealistic, and the base figure itself, being 250% increase over immediately preceding year, is doubtful. The explanation for the share premium in the shares of the assessee company does not, for the detailed reasons set out above, meet our approval. Undoubtedly, the company investing in the assessee company, i.e. RVPL, itself is owned by some other entities and the actual investors are thus not known in a transparent manner. The assessee does not throw any light beyond submitting the financial statements of the company investing shares. The genuineness of investment is far from established for this reason as well. Onus is on the assessee to prove genuineness of the transaction to the satisfaction of a fact finding authority-something which. he has miserably failed in, to justify the huge share premium received by the assessee- something which the material on record does not justify, and to demonstrate that the facts and circumstances of the transaction as whole must point towards the impugned transaction being a regular transaction in the normal course of business- something which is clearly missing. Quite to the contrary, the assessee has proceeded on the basis as if the onus is on the Assessing Officer to demonstrate that the share subscriptions in question are malafide and cooked up and that the assessee has introduced his own unaccounted money by way of these share subscriptions; that is certainly incorrect. The burden is thus on the assessee to prove the nature and source of credits in his books of accounts, to the satisfaction of the Assessing Officer. Everything thus hinges on the explanation given by the assessee and on how acceptable is the explanation so given by the assessee. - Decided against assessee.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Addition of unexplained cash credit under Section 68 of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of Reopening the Assessment:
The Assessing Officer (AO) reopened the assessment based on information from the investigation wing indicating that the assessee received share application money from entities involved in money laundering. The assessee argued that all material facts were disclosed during the original assessment, and the reopening was unjustified. However, the tribunal upheld the AO's action, citing that mere disclosure of transactions at the time of original assessment does not qualify as "true and full" disclosure if subsequent information reveals the transactions to be bogus. The tribunal relied on the Supreme Court's judgment in Phool Chand Bajrang Lal Vs ITO, which allows reopening if new information indicates that the original transactions were false.

2. Addition of Unexplained Cash Credit:
The AO treated the share application money received from Rohini Vyapar Pvt Ltd (RVPL) and Manbhawan Commercial Pvt Ltd (MCPL) as unexplained credits under Section 68, amounting to ?8,13,29,600. The AO's decision was based on the investigation report indicating that these entities were shell companies involved in a money-laundering racket. The assessee provided documentary evidence, including PAN details, income tax returns, and financial statements of the share subscribers, to prove the genuineness of the transactions. However, the AO found these documents insufficient to establish the genuineness of the transactions.

The tribunal noted several discrepancies in the financial statements and bank transactions of RVPL and MCPL, indicating that these entities acted as conduits for routing funds. The tribunal observed that RVPL and MCPL had negligible business activities and primarily invested in the assessee's shares at a high premium. The tribunal also found that the share premium valuation provided by the assessee was based on unrealistic assumptions and incorrect computations, further questioning the genuineness of the transactions.

The tribunal emphasized that the onus is on the assessee to prove the genuineness of the share application money, which the assessee failed to do. The tribunal also highlighted the importance of examining the transactions in the light of human probabilities and ground realities, as observed by the Supreme Court in Durga Prasad More's case.

Conclusion:
The tribunal upheld the reopening of the assessment under Section 147 and restored the addition of ?8,13,29,600 as unexplained cash credit under Section 68. The tribunal concluded that the assessee failed to prove the genuineness of the share application money and that the transactions were part of a money-laundering racket involving shell companies. The tribunal's decision was based on a thorough analysis of the financial statements, bank transactions, and the overall circumstances of the case.