2022 (11) TMI 538 - AT - Income Tax

Addition u/s 68 - Unexplained share capital/share premium received by the assessee during the year - HELD THAT - We note that the said investment was made out of funds generated by liquidating the investment of the company thus in both the above cases even the creditworthiness is not proved and transactions are genuine. Considering all these facts we are not in concurrence with the conclusion of the CIT(A) that this transaction are not genuine besides we note the assessee company has raised sales near real estate projects at Lucknow for which piece of land was already acquired besides we note the assessee company has entered into for number of purchase agreements and also sold some property and thus realized the profit from the said transaction. We also note that the AO has invoked First proviso to Section 68 which states that the source of source of such credit has to be proved. We observe from the perusal of the Act that First proviso was inserted by the Finance Act, 2012 and is applicable from 01.04.2013 meaning thereby the immediate effect for AY 2013-14 and not from the instant assessment year. Considering the above facts and circumstances of the case, we are inclined to set aside the order of CIT(A) by allowing the appeal of the assessee.

Issues Involved:

1. Addition of Rs. 1,08,00,000/- under Section 68 of the Income Tax Act, 1961.
2. Justification for issuance of shares at a high premium.
3. Compliance with statutory notices and summons.
4. Identity, creditworthiness of investors, and genuineness of transactions.
5. Applicability of the first proviso to Section 68 of the Act.

Issue-wise Detailed Analysis:

1. Addition of Rs. 1,08,00,000/- under Section 68 of the Income Tax Act, 1961:

The primary issue in this appeal is the addition of Rs. 1,08,00,000/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, concerning the share capital and share premium received by the assessee during the year. The AO observed that the investments/subscription of share/share premium remained unexplained as the source of funds could not be proved. The Ld. Commissioner of Income Tax (Appeals) [CIT(A)] upheld this addition, leading to the present appeal.

2. Justification for Issuance of Shares at a High Premium:

The AO questioned the issuance of shares at a high premium by the assessee, arguing there was no justification for such a high premium without having any business or profitable venture. The assessee contended that issuing shares at a high premium was a business decision taken by the Board of Directors to finance its project, which included the acquisition of commercial land for offices/commercial spaces at Lucknow. The Ld. CIT(A) and AO did not accept this justification.

3. Compliance with Statutory Notices and Summons:

During the assessment proceedings, the AO issued statutory notices and summons under Sections 131 and 133(6) of the Act to the share subscribers, M/s Knitworth Exports Ltd., and M/s Piyush Commodities Pvt. Ltd. M/s Knitworth Exports Ltd. complied with the summons, and their director's statements were recorded. M/s Piyush Commodities Pvt. Ltd. did not comply initially but appeared during the remand proceedings, confirming their investment in the assessee company.

4. Identity, Creditworthiness of Investors, and Genuineness of Transactions:

The assessee provided all necessary details and evidence to prove the identity, creditworthiness, and genuineness of the transactions. The AO and Ld. CIT(A) doubted the genuineness and creditworthiness of the investor companies, stating they were not engaged in any business and had no income. However, the assessee argued that both companies had sufficient net worth and invested their own funds through banking channels. The Tribunal noted that both companies were regularly filing returns and had substantial net worth, supporting the genuineness and creditworthiness of the transactions.

5. Applicability of the First Proviso to Section 68 of the Act:

The AO invoked the first proviso to Section 68, which requires proving the source of the source of such credit. The assessee contended that this proviso was inserted by the Finance Act, 2012, effective from 01.04.2013, and thus applicable for AY 2013-14 onwards, not for the instant assessment year (AY 2012-13). The Tribunal agreed with the assessee's contention, stating that the first proviso to Section 68 was not applicable for the assessment year under consideration.

Conclusion:

The Tribunal found that the assessee had provided sufficient evidence to prove the identity, creditworthiness, and genuineness of the transactions. The Tribunal disagreed with the conclusions of the AO and Ld. CIT(A), noting that the investor companies had substantial net worth and invested their own funds. The Tribunal also observed that the first proviso to Section 68 was not applicable for the assessment year under consideration. Therefore, the Tribunal set aside the order of the Ld. CIT(A) and allowed the appeal of the assessee.

Order:

The appeal of the assessee is allowed. The order was pronounced in the open court on 9th November 2022.

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