2024 (7) TMI 1608 - AT - Income Tax

Addition u/s 68 - treating share capital and share premium received as unexplained income of the assessee u/s 68 - HELD THAT - We find that the assessee has successfully discharged the burden of proof primarily casted upon it to explain the identity and creditworthiness of all the 9 share applicants and genuineness of the share transactions and correctness of such details has not been disputed by the Revenue Authorities except making general observations. No justification on the part of the lower authorities in making the impugned addition and the same is accordingly ordered to be deleted. Appeal of the assessee stands allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issue considered in this judgment was whether the addition of Rs.89,65,000 made by the Assessing Officer (AO) as unexplained income under Section 68 of the Income Tax Act was justified. The Tribunal needed to determine if the assessee had sufficiently demonstrated the identity, creditworthiness, and genuineness of the transactions involving share capital and share premium received from nine share-subscribers.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act requires that any sum credited in the books of an assessee, for which no satisfactory explanation is provided regarding its nature and source, may be charged as income. The legal burden initially lies on the assessee to prove the identity, creditworthiness, and genuineness of the transaction. The precedents cited include decisions from higher courts emphasizing the necessity for the AO to conduct a thorough inquiry if the assessee has provided prima facie evidence.

Court's Interpretation and Reasoning: The Tribunal observed that the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] failed to conduct a thorough inquiry into the evidence provided by the assessee. The assessment order was criticized for being non-specific and mechanical, lacking detailed examination of the documents submitted by the assessee to prove the identity and creditworthiness of the share-subscribers.

Key Evidence and Findings: The assessee provided comprehensive documentation, including income tax returns, audited accounts, share application forms, and responses to notices under Section 133(6) of the Act. These documents were intended to establish the identity and creditworthiness of the share-subscribers and the genuineness of the transactions. The Tribunal noted that the AO did not identify any discrepancies in these documents.

Application of Law to Facts: The Tribunal applied the principles from the Supreme Court's decision in "PCIT v/s NRA Iron & Steel (P) Ltd." which outlines the obligations of the assessee and the AO under Section 68. The Tribunal concluded that the assessee had discharged its initial burden by providing sufficient evidence, and the AO failed to conduct the necessary inquiries to refute this evidence.

Treatment of Competing Arguments: The Departmental Representative (DR) argued that the share-subscribers had low net profits and engaged in transactions with lesser-known companies, suggesting a lack of creditworthiness. However, the Tribunal found these arguments insufficient to justify the addition, as the AO did not substantiate these claims with evidence.

Conclusions: The Tribunal concluded that the assessee had successfully demonstrated the identity, creditworthiness, and genuineness of the share-subscribers. The AO's failure to conduct a proper inquiry and the mechanical approach of the CIT(A) led to the conclusion that the addition under Section 68 was unwarranted.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "The assessee having discharged initial burden upon him to furnish the evidences to prove the identity and creditworthiness of the share subscribers and genuineness of the transaction, the burden shifted upon the Assessing Officer to examine the evidences furnished and even made independent inquiries."

Core Principles Established: The Tribunal reinforced the principle that once an assessee provides prima facie evidence of the identity, creditworthiness, and genuineness of transactions, the AO must conduct a detailed inquiry before making an addition under Section 68. The AO cannot rely on general observations or assumptions without substantive evidence.

Final Determinations on Each Issue: The Tribunal held that the addition of Rs.89,65,000 as unexplained income was not justified and ordered its deletion. The appeal of the assessee was allowed, and the Tribunal emphasized the necessity for revenue authorities to substantiate their claims with concrete evidence rather than relying on assumptions or mechanical approaches.