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2022 (5) TMI 366 - AT - Income TaxUnexplained cash credit u/s 68 - case was selected for limited scrutiny through CASS to verify whether the funds received in the form of share premium are from disclosed sources and have been correctly offered to tax - A.O. was not satisfied with the arguments advanced by the assessee and noted that the share premium so received by the assessee is nothing but an accommodation entry and implies that the whole transaction is a sham one - CIT(A) held that the assessee failed to prove on record any evidence to justify the basis of share premium charged in excess of its face value and held that the share premium received in excess of the face value should be held as income of the appellant under section 56 (2) (viib) on protective basis - HELD THAT - As relying on MANTRAM COMMODITIES PVT. LTD. VERSUS ITO, WARD 1 (5) FARIDABAD 2021 (3) TMI 459 - ITAT DELHI CIT(A) was not justified in making the addition on protective basis by invoking the provisions of Section 56(2)(vii)(b) of the I.T. Act, 1961. Addition u/s 68 - Assessee has filed the details such as P L A/c, balance-sheet, bank statements, confirmation letters, PAN, copy of acknowledgment of return, Memorandum and Articles of Association of Companies etc.to substantiate the identity and creditworthiness of the share applicants and genuineness of the transaction. Nothing has been brought on record to negate the various evidences filed by the assessee. A perusal of the audited balance-sheet of these Investor Companies shows that these companies are having sufficient capital and reserves to make the investment in the assessee company and the entire transactions have been made through banking channel. Merely because the Investor Companies have shown meager income during the impugned assessment year, the same in my opinion, cannot be a ground to doubt the creditworthiness of the said company especially when the said company is having sufficient funds in its account in shape of share capital and free reserves. Since the assessee in the instant case has proved the identity of the investors and filed sufficient details to substantiate the creditworthiness and genuineness of the transaction, therefore, hold that the Ld. CIT(A) was not justified in confirming the addition made by the A.O. under section 68 - therefore, set aside the Order of the Ld. CIT(A) and delete the addition. Grounds raised by the assessee are allowed.
Issues Involved:
1. Addition under Section 68 of the I.T. Act, 1961. 2. Addition under Section 56(2)(viib) of the I.T. Act, 1961 on a protective basis. Issue-wise Detailed Analysis: 1. Addition under Section 68 of the I.T. Act, 1961: The assessee, a company, filed its return of income for the A.Y. 2016-17 declaring an income of Rs.1,47,120/-. The case was selected for limited scrutiny to verify the source of funds received as share premium. During the assessment, the A.O. noted that the assessee had allotted 57,500 equity shares at a premium of Rs.70/- per share to four entities. The A.O. was not satisfied with the explanations and documents provided by the assessee, deeming the transactions as sham and treating the share premium and share capital of Rs.46,00,000/- as unexplained cash credit under Section 68 of the I.T. Act, 1961. The Ld. CIT(A) upheld the A.O.'s decision, stating that the assessee failed to establish the identity, creditworthiness, and genuineness of the transactions. The CIT(A) observed that the investor companies were paper entities with no substantial business activities or assets to justify the investments made. The CIT(A) relied on various judicial precedents to support the decision. 2. Addition under Section 56(2)(viib) of the I.T. Act, 1961 on a protective basis: The Ld. CIT(A) further held that the share premium received in excess of the face value should be treated as income under Section 56(2)(viib) of the I.T. Act, 1961 on a protective basis. The CIT(A) noted that the assessee failed to provide any valuation report or evidence to justify the premium charged. Consequently, the income of the assessee was enhanced by Rs.40,25,000/- under Section 251(1) of the Act, and penalty proceedings under Section 271(1)(c) were initiated for furnishing inaccurate particulars of income. Tribunal's Findings: The Tribunal found merit in the assessee's argument that the valuation of shares should be done in accordance with Rule 11UA of the I.T. Rules, 1962. The assessee had issued shares at Rs.80 per share (face value of Rs.10 + premium of Rs.70), and the valuation was supported by a Chartered Accountant's certificate. The Tribunal noted that the A.O. and CIT(A) arbitrarily rejected the valuation without following the prescribed method under Rule 11UA. The Tribunal referred to the decision in the case of Mantram Commodities (P.) Ltd. and held that the authorities must follow the statutory procedure for valuation. The Tribunal also found that the assessee had provided sufficient documentary evidence to prove the identity, creditworthiness, and genuineness of the share applicants. The investor companies had sufficient capital and reserves, and the transactions were made through banking channels. Conclusion: The Tribunal set aside the order of the CIT(A) and directed the A.O. to delete the addition of Rs.40,25,000/- made under Section 56(2)(viib) on a protective basis. The Tribunal also deleted the addition of Rs.46,00,000/- made under Section 68, holding that the assessee had discharged its onus of proving the identity, creditworthiness, and genuineness of the transactions. The appeal of the assessee was allowed.
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