2022 (2) TMI 807 - AT - Income Tax

Addition of bogus share application money u/s 68 - explanation to source of the source - scope of amended provisions of section 68 - assessee receiving a credit has to testify its case through the 'triple marker test' of Identity, Creditworthiness and Genuineness of Transactions - HELD THAT - In the instant case, the credit is in the form of receipt of share capital from share applicants. The nature of receipt towards share capital is seen from the entries passed in the respective balance sheets of the companies as share capital and investments. In respect of source of credit, the assessee has to prove the three necessary ingredients i.e. identity of share applicants, genuineness of transactions and creditworthiness of share applicants. For proving the identity of share applicants, the assessee furnished the name, address, PAN of share applicants together with the copies of balance sheets and Income Tax Returns. With regard to the creditworthiness of share applicants, we noted that these share applicants are having capital and reserves and the investment made in the assessee company is only a small part of their capital. These transactions are also duly reflected in the balance sheets of the share applicants, so creditworthiness is proved. Even if there was any doubt, if any, regarding the creditworthiness of the share applicants was still subsisting, then AO should have made enquiries from the AO of the share subscribers. We note that with effect from assessment year 2013-14 section 68 of the Act has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the A.O., the same shall be deemed to be the income of the company u/s 68 of the Act. The said amendment has been held to be prospective and not retrospective by Gagandeep Infrastructure Private Limited 2017 (3) TMI 1263 - BOMBAY HIGH COURT . We note that in assessee s case under consideration, the amended provisions of section 68 are not applicable, as the assessment year involved in the assessee s case is assessment year 2012-13, hence the assessee need not to explain the source of the source. We note that with effect from assessment year 2013-14 section 68 of the Act has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the A.O., the same shall be deemed to be the income of the company u/s 68 of the Act. The said amendment has been held to be prospective and not retrospective by Hon ble Bombay High Court in Gagandeep Infrastructure Private Limited 2017 (3) TMI 1263 - BOMBAY HIGH COURT - We note that in assessee s case under consideration, the amended provisions of section 68 are not applicable, as the assessment year involved in the assessee s case is assessment year 2012-13, hence the assessee need not to explain the source of the source - Decided in favour of assessee.

Issues Involved:
1. Addition of ?2,33,01,950/- under Section 68 of the Income Tax Act, 1961, treating share capital and share premium received from shareholders as unexplained cash credits.
2. Verification of identity, creditworthiness, and genuineness of the transactions related to the share capital and share premium.
3. Application of judicial precedents and legal principles regarding the treatment of share capital and share premium under Section 68.

Detailed Analysis:

1. Addition of ?2,33,01,950/- under Section 68 of the Income Tax Act, 1961:

The assessee, a private limited company engaged in manufacturing texturized yarn, filed its return of income for the assessment year 2012-13, showing a total loss of ?18,22,48,493/-. During the scrutiny assessment, the Assessing Officer (AO) noticed that the assessee received share capital/share premium from various parties but failed to explain the identity, creditworthiness, and genuineness of these transactions. Consequently, the AO added ?2,33,01,950/- as unexplained cash credits under Section 68 of the Act. The CIT(A) upheld this addition, leading to the assessee's appeal before the ITAT.

2. Verification of Identity, Creditworthiness, and Genuineness of the Transactions:

The assessee provided documents such as balance sheets, profit and loss accounts, bank statements, PAN numbers, and postal addresses of all investors. Despite this, the AO found that many investors were from Ranchi, Jharkhand, with common addresses, and failed to produce necessary documents during an enquiry by the DDIT(Inv.), Ranchi. The AO concluded that the investors lacked creditworthiness and treated the share capital/premium as unexplained cash credits.

In defense, the assessee's counsel argued that all transactions were made through proper banking channels and submitted comprehensive details for each share applicant, including names, PAN numbers, net income, amount received, capital balances, and supporting documents. The counsel cited several judicial precedents to support the genuineness of the share capital.

3. Application of Judicial Precedents and Legal Principles:

The ITAT examined the case in light of the "triple marker test" of identity, creditworthiness, and genuineness of transactions. The assessee provided a detailed chart showing comprehensive information about each share applicant, which included their income tax returns, balance sheets, bank statements, and sources of payment. The ITAT noted that the assessee had discharged its onus by providing sufficient evidence to prove the identity, creditworthiness, and genuineness of the share applicants.

The ITAT referred to the findings of a coordinate bench in a similar case involving some of the same share applicants, where the addition under Section 68 was deleted. The Tribunal emphasized the principle established by the Hon'ble Supreme Court in CIT v. Lovely Exports (P) Ltd., which held that if the share application money is received from alleged bogus shareholders whose names are given to the AO, the Department is free to proceed against the individual shareholders but cannot treat the amount as undisclosed income of the company.

The ITAT also cited other judicial precedents, including the Hon'ble Gujarat High Court's decision in CIT v. Ranchhod Jivabhai Nakhava and the Hon'ble Supreme Court's decision in CIT v. Orissa Corporation (P) Ltd., which supported the assessee's position.

Conclusion:

The ITAT concluded that the assessee had satisfactorily proved the identity, creditworthiness, and genuineness of the share applicants. The Tribunal noted that the AO had not made adequate inquiries with the AO of the share subscribers and had not provided sufficient evidence to disprove the assessee's claims. Therefore, the ITAT deleted the addition of ?2,33,01,950/- made under Section 68 of the Act and allowed the appeal of the assessee.

Order:

The appeal of the assessee was allowed, and the addition of ?2,33,01,950/- under Section 68 was deleted. The order was pronounced on 09/02/2022 by placing the result on the Notice Board.

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