2023 (4) TMI 1349 - AT - Income Tax

Addition u/s 68 - assessee had failed to establish the identity, genuineness and creditworthiness of the share subscribers - HELD THAT - As subsidiary companies were promoted by the parent company only for the purpose of expanding its business and the deals were purely commercial in nature. The main purpose or object of carrying business through subsidiaries was to mitigate the risk associated with a specific project and to create a distinct identity of the project. It also results in operational efficiency and control. Since different projects were in partnership with different persons and the existing projects were matured and operational, so it became necessary to form Special Purpose Vehicles (SPVS) to undertake the new projects. Once the project was complete or during its continuation, it becomes easier to attract an investor which helps in arranging funds for the project. It was not considered viable to keep the level of Authorized Paid-up Share Capital at a very high level. If the Authorized Share Capital of the company is kept at a higher level, the company has to pay mammoth fees to ROC. So the company purposively kept the paid up capital base at a low level to save on unnecessary fees to ROC and also to save on servicing cost of the capital in future. Assessee has further submitted that the CIT(A) had even called for remand report from the AO in respect of various details and the evidences submitted by the assessee. CIT(A), thereafter, has passed a detailed order after considering the remand report and other evidences furnished by the assessee. CIT(A) has categorically held that the share subscriber company was a group company of the assessee and the transaction was done for business interest and further that the identity, creditworthiness and genuineness of the transaction was duly proved. In the identical facts and circumstances, Anmol Stainless (P) Ltd. 2019 (8) TMI 834 - ITAT KOLKATA has upheld the order of the Tribunal deleting the additions observing that where the share applicants had substantial creditworthiness and the investment has been made by the assessee s own sister concern/group company having mostly common directors and thus establishing creditworthiness and genuineness of the transaction, the addition u/s 68 has rightly been deleted. Appeal of the Revenue stands dismissed.

Summary

Issues:
- Appeal against deletion of additions made by the Assessing Officer regarding unexplained income under section 68 of the Income Tax Act.
- Establishing identity, genuineness, and creditworthiness of share subscribers.
- Transaction between holding and subsidiary companies.
- Comparison with similar cases for deletion of additions under section 68.

Analysis:
The appeal before the Appellate Tribunal ITAT Kolkata involved the Revenue challenging the deletion of additions made by the Assessing Officer regarding unexplained income under section 68 of the Income Tax Act. The Revenue contested the action of the CIT(A) in deleting the additions, arguing that the assessee failed to establish the identity, genuineness, and creditworthiness of the share subscribers. The assessee explained that the share capital was raised from a single company, its parent company, for a real estate project. The CIT(A) considered various aspects, including the relationship between the companies, the nature of the business, and the source of funds. The CIT(A) concluded that the transaction was for business interest and the identity, creditworthiness, and genuineness were duly proved.

Regarding the transaction between the holding and subsidiary companies, the assessee clarified that the parent company provided funds for the project, and the subsidiaries were formed to expand business and mitigate risks. The purpose was to create distinct identities for projects, enhance operational efficiency, and attract investors. The decision highlighted that maintaining a high level of authorized share capital would result in unnecessary fees and servicing costs, so the paid-up capital was purposefully kept low.

The assessee's counsel referenced a similar case where the Hon'ble Calcutta High Court upheld the Tribunal's decision to delete additions under section 68. The High Court emphasized substantial creditworthiness of share applicants, investments made by the assessee's sister concern/group company with common directors, and the genuineness of the transactions. The Tribunal, after considering the arguments, upheld the CIT(A)'s order, dismissing the Revenue's appeal. The decision was based on the findings that the transaction was genuine, supported by business interests, and established the identity and creditworthiness of the share subscriber company.

In conclusion, the Tribunal affirmed the CIT(A)'s order, dismissing the Revenue's appeal. The decision was based on the thorough consideration of facts, the nature of the transaction, and the establishment of identity and creditworthiness, in line with relevant legal precedents.

This comprehensive analysis of the judgment highlights the key issues, arguments presented, and the Tribunal's decision in the matter.