2023 (1) TMI 1468 - AT - Income Tax

Undisclosed cash credit u/s 68 - assessee has failed to prove the genuineness of transaction and creditworthiness of the subscribers - Bogus share capital issued by the assessee company - CIT(A) considering the entire details on record observed that all the share subscribers were group entities and that the money was also received by the appellant from them even on earlier occasions also and further that the creditworthiness and identity has been accepted by the AO in the earlier years deleted addition - only contention raised by the AO was that the directors did not appear for personal examination - HELD THAT - CIT(A) after examining all the documents and relying upon the judicial decisions observed that merely because the directors did not appear before the AO that itself was not sufficient enough to hold that the entire transaction was bogus. The CIT(A) considered the relevant documents on record and also considering that the share subscriber companies were having sufficient net worth to invest in the assessee company has deleted the addition so made by the AO. Assessee has further submitted that even otherwise there was no doubt / suspicion raised by the AO either about the identity or of the creditworthiness of the share subscribers. He in this respect has submitted that the assessee company during the year had received share capital from four companies out of which three companies were group concerns of the assessee company and the fourth company i.e. Fort Projects Pvt. Ltd was a reputed company of Kolkata engaged in the profession of real estate developer/builder. That the said company i.e. Fort Projects Pvt. Ltd had a net worth and profits/turnover in millions of rupees. That even in the earlier years the share application money was received by the assessee from the said company which was accepted by the Department. For Nortex Reality Ltd. was group company of the assessee company and the company s net worth and profits/turnover was also in millions of rupees. The company has furnished all the details in respect of notice u/s 133(6) of the Act. That the company was also enjoying bank overdraft facility and that the Assessing Officer in the remand report has not made any adverse comment against the said company. For Hope Enterprises Pvt. Ltd.there was no doubt about the identity of the said company. The company has duly filed the response to the notice u/s 133(6) of the Act. The share application money received by the aforesaid group entities by the assessee company in the earlier years has been accepted by the Department. For Poddar Projects Pvt. Ltd. the Income Tax Office of the Department was run in the hired building owned by the Poddar Group. He therefore has submitted that there was no question of suspicion about the identity and creditworthiness not only of the assessee company but also its group companies. Thus no reason to interfere with the order of the CIT(A) and the same is accordingly upheld. The appeal of the Revenue is hereby dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment presented involves several core issues:

• Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in granting relief to the assessee by deleting the addition of undisclosed cash credits under Section 68 of the Income Tax Act, amounting to Rs. 9,16,20,000.
• Whether the assessee failed to prove the genuineness of the transactions and the creditworthiness of the subscribers.
• Whether the CIT(A) overlooked the principles established by the Supreme Court in the case of Pr.CIT(Central)-1, Delhi Vs. NRA Iron & Steel Pvt. Ltd., which mandates the assessee to prove the receipt of share capital premium to the satisfaction of the Assessing Officer (AO).
• Whether the CIT(A) was correct in concluding that the share capital raised did not constitute the assessee's own income.
• Whether the CIT(A) erred in ignoring the facts that the creditworthiness of the subscribing companies was not established before the AO during the assessment proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Relief Granted by CIT(A)

• Legal Framework and Precedents: Section 68 of the Income Tax Act requires the assessee to prove the identity, creditworthiness, and genuineness of the transactions involving cash credits. The case of Pr.CIT(Central)-1, Delhi Vs. NRA Iron & Steel Pvt. Ltd. is a significant precedent.
• Court's Interpretation and Reasoning: The CIT(A) observed that the share application money was received over several years and not just in the assessment year in question. The CIT(A) concluded that the AO's addition was based on a misunderstanding of the timing of the transactions.
• Key Evidence and Findings: The assessee provided documentary evidence, including audited financial statements, to demonstrate the identity and creditworthiness of the subscribers. The CIT(A) noted that the AO had accepted these entities' creditworthiness in previous years.
• Application of Law to Facts: The CIT(A) applied the principles from relevant precedents, concluding that the addition under Section 68 was not justified for the assessment year in question.
• Treatment of Competing Arguments: The CIT(A) addressed the AO's concerns about the non-appearance of directors by noting that the law does not mandate personal appearances if documentary evidence is sufficient.
• Conclusions: The CIT(A) deleted the addition, finding the AO's reasoning flawed and unsupported by the evidence.

Issue 2: Genuineness and Creditworthiness of Transactions

• Legal Framework and Precedents: The burden of proof lies with the assessee to demonstrate the genuineness of transactions and the creditworthiness of subscribers under Section 68.
• Court's Interpretation and Reasoning: The CIT(A) found that the assessee had provided sufficient evidence to establish the genuineness and creditworthiness of the transactions.
• Key Evidence and Findings: The assessee submitted financial statements, bank statements, and other documents to support the transactions' authenticity.
• Application of Law to Facts: The CIT(A) applied the legal standards for proving genuineness and creditworthiness, concluding that the assessee met these requirements.
• Treatment of Competing Arguments: The CIT(A) dismissed the AO's argument about the lack of personal appearances, emphasizing the sufficiency of documentary evidence.
• Conclusions: The CIT(A) concluded that the transactions were genuine and the subscribers creditworthy, justifying the deletion of the addition.

Issue 3: Application of Supreme Court Precedent

• Legal Framework and Precedents: The Supreme Court's decision in the NRA Iron & Steel case emphasizes the assessee's obligation to prove the genuineness of share capital receipts.
• Court's Interpretation and Reasoning: The CIT(A) distinguished the present case from the NRA Iron & Steel case, noting that the facts and evidence differed significantly.
• Key Evidence and Findings: The CIT(A) relied on the evidence provided by the assessee, which was not available in the NRA Iron & Steel case.
• Application of Law to Facts: The CIT(A) applied the principles from the Supreme Court decision, concluding that the assessee had met the burden of proof.
• Treatment of Competing Arguments: The CIT(A) addressed the AO's reliance on the Supreme Court precedent, explaining why it was not applicable in this case.
• Conclusions: The CIT(A) found that the Supreme Court precedent did not warrant the addition under the circumstances of this case.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "Merely because the directors did not appear before the Assessing Officer, that itself, was not sufficient enough to hold that the entire transaction was bogus."
• Core Principles Established: The judgment reinforces the principle that documentary evidence can suffice to prove the genuineness and creditworthiness of transactions, negating the need for personal appearances.
• Final Determinations on Each Issue: The appeal by the Revenue was dismissed, and the CIT(A)'s order to delete the addition was upheld. The cross-objection by the assessee was also dismissed as not maintainable.

The judgment highlights the importance of documentary evidence in tax assessments and clarifies the application of legal standards under Section 68 of the Income Tax Act. It underscores the need for Assessing Officers to base their conclusions on a thorough examination of evidence rather than assumptions or procedural shortcomings.