2024 (4) TMI 989 - HC - Income Tax

Unexplained cash credit u/s 68 - non-establishment to prove the creditworthiness or the genuineness of a transaction - all investor companies are group companies - ITAT deleted the additions - HELD THAT - CIT(A) has made an elaborate exercise to assess the creditworthiness of the investor companies as well as the genuineness. All the investor companies are group companies and the directors are closely related to the director of the assessee company and the director Mr. Agarwala himself is one of the directors in one of the investor companies, therefore, on a deeper scrutiny of the factual position would show that the investor company did not have a genuine creditworthiness and consequently the transaction has to be held to be not genuine. - As held earlier certificate of incorporation of the companies, payment by banking channel etc. cannot tantamount to satisfactory discharge of onus and the facts of the case on hand speaks for itself as it is obvious. Thus, the principle of Preponderance of Probabilities applies with full force to the case on hand which leads to the irresistible conclusion that the finding rendered by the CIT(A) is legal and valid. The assessee in their submission contended that their business activity has increased considerably and for the purpose of expansion funds were required and therefore the assessee raised funds from various means, increment in share capital from associates being one of them. The fact clearly demonstrates that the source of the funds which have flown into the account of the assessee have substantially come from one company namely Gainwell Textrade Private Limited and the said company had contributed to the other companies and the funds transferred to those companies were transferred to the assessee company invariably on the same day leaving a bank balance which was almost negligible and the bank statements reveal that the prior to the inflow of the funds into those investing companies, the bank balance was negligible and after the transfer it was also negligible. The assessee had contended before the tribunal that the amount was credited through proper banking channels and the investing companies are body corporate registered with the Registrar of Companies and individually assessed to income tax and therefore the genuineness of the parties is beyond doubt. However, this is not the litmus test to discharge the burden on the assessee to establish creditworthiness of the investing companies as well as the genuineness of the transaction. Thus, we have no hesitation to hold that the explanation offered by the assessee is neither proper, reasonable or acceptable. In Swati Bajaj 2022 (6) TMI 670 - CALCUTTA HIGH COURT the court held that based on the foundational facts the department has adopted the concept of working backward leading to the assessee. The department would be well justified in considering the surrounding circumstances, the normal human conduct of a prudent investor, the probabilities that may spill over and then arrive at a decision. Thus the CIT(A) was right in adopting a logical process of reasoning considering the totality of the facts and circumstances surrounding the allegations made against the assessee taking note of the minimum and proximate facts and circumstances surrounding the events on which charges are founded so as to reach a reasonable conclusion and rightly applied the test that a reasonable/prudent man would apply to arrive at a conclusion. On facts we are convinced to hold that the assessee has not established the capacity of the investors to advance moneys for purchase of above shares at a high premium. The credit worthiness of those investors companies is questionable and the explanation offered by the assessee, at any stretch of imagination cannot be construed to be a satisfactory explanation of the nature of the source. The assessee has miserably failed to establish genuineness of the transaction by cogent and credible evidence and that the investments made in its share capital were genuine. As noted above merely proving the identity of the investors does not discharge the onus on the assessee if the capacity or the credit worthiness has not been established. Thus we hold that the assessee has failed to discharge legal obligation to prove the genuineness of the transaction and the credit worthiness of the investor which has shown to be so by a round tripping of funds. For all the above reasons, the revenue succeeds.

Summary

Issues Involved:
1. Deletion of addition u/s 68 of the Income Tax Act.
2. Consideration of judicial principles in the context of the case.
3. Examination of the facts of the case for perversity.
4. Establishment of identity, creditworthiness, and genuineness of transactions.

Summary:

Issue 1: Deletion of Addition u/s 68 of the Income Tax Act
The appeal by the revenue challenged the deletion of Rs. 14,63,00,000/- added as unexplained cash credit u/s 68. The Assessing Officer (AO) noted that the assessee issued shares to five companies and suspected the transactions to be a means of introducing undisclosed income. The AO added the share application money as undisclosed cash credit due to the non-appearance of directors and inadequate documentation. The CIT(A) conducted a fact-finding exercise, noting that the investor companies had negligible revenue and were involved in mere rotation of funds. The tribunal, however, held that the identity of the share subscribers was established and the transactions were genuine, thus deleting the addition.

Issue 2: Consideration of Judicial Principles
The revenue contended that the tribunal failed to consider the judicial principles laid down in Pr. CIT 5, Kolkata Vs Swati Bajaj, which emphasized the need for a holistic view of transactions, considering ground realities and preponderance of probabilities. The CIT(A) analyzed the financial statements and bank accounts, concluding that the transactions were well-planned and stage-managed, involving circular routing of funds. The tribunal, however, did not delve into the depth of these findings, leading to a potential oversight of crucial judicial principles.

Issue 3: Examination of Facts for Perversity
The revenue argued that the tribunal's order was perverse as it failed to consider the facts properly. The CIT(A) found that the investor companies had no real business activity and were involved in rotating funds to create a façade of genuine transactions. The tribunal, however, focused on the identity and banking channels of the investors, overlooking the deeper scrutiny required to establish genuineness and creditworthiness. The High Court held that the tribunal's findings were perverse and restored the CIT(A)'s order.

Issue 4: Establishment of Identity, Creditworthiness, and Genuineness
The tribunal concluded that the identity of the share subscribers was established, and the transactions were genuine. However, the CIT(A) found that the investors had negligible business operations and were involved in circular transactions, indicating a lack of genuine creditworthiness. The High Court emphasized that mere banking transactions and income tax assessments are insufficient to establish genuineness. The onus was on the assessee to prove the creditworthiness and genuineness of the transactions, which was not satisfactorily discharged.

Conclusion:
The High Court allowed the revenue's appeal, setting aside the tribunal's order and restoring the CIT(A)'s order. The substantial questions of law were answered in favor of the revenue, emphasizing the need for a thorough examination of identity, creditworthiness, and genuineness in transactions involving share capital and premium.