2024 (6) TMI 599 - AT - Income Tax

Addition u/s 68 - addition of share capital share premium notional interest on interest free loan given to sister concern - notice u/s 133(6) of the Act had not been replied or not served by the investors - Addition made as parties does not exist in the addresses given by the assessee - primary onus cast to establish the genuineness of the transaction together with identity and creditworthiness of the investors HELD THAT - The transactions of investments made by the investors in assessee company were made through regular banking channels and duly reflected in the balance sheet of the investors. Share application forms coupled with minutes of the Board meeting and share certificates in addition to the aforesaid documents proved the genuineness of the transaction. No deficiencies whatsoever were pointed out by the ld AO on the elaborate documents submitted by the assessee. Assessee had duly justified the fact of issuance of shares at a premium to these investors despite the fact that the shares were allotted to the original promoters were at par. It is very reasonable for any company to issue shares to the outside investors at a premium in order to ensure that the promoter‟s stake in the company does not get diluted. Investors come forward with accepted mindset to make investment at a premium seeing the growth potential prevalent in the investee company. The assessee had duly discharged its primary onus cast on it by furnishing the requisite documents before the ld AO. Merely because the notice u/s 133(6) of the Act had not been replied or not served by the investors and directors of the investors company were not produced coupled with less income shown by the investors in their ITR, the transaction of making investment by the investors in the assessee company cannot be doubted. If the ld AO had entertained any doubt on the documents submitted by the assessee, nothing prevented him from issuing summons to the investors company and if none complied, take the proceedings further in the manner known to the law. Hence, the primary onus has been duly discharged by the assessee, the burden of proof therefore shifts to the ld AO. The assessee cannot be faulted after furnishing the requisite documents. Some of the investors had duly responded directly before the ld AO in response to the notice issued u/s 133(6) of the Act. Hence, there is absolutely no reason for the ld AO to draw adverse inference on the documents submitted by the assessee. AO had also stated that cash was deposited by the investors before making investment in the assessee company, which fact was found to be incorrect on perusal of the bank statements. In view of the aforesaid observations, the ld CIT(A) had rightly deleted the addition made u/s 68. Notional interest added by the ld AO - As we find that the same had been added completely on notional basis without having any support from the provisions of the Act. The assessee had indeed given interest free loans of Rs. 1.48 crores to M/s. Pacific Industries Ltd. The assessee had not claimed any deduction for interest payment on its borrowings. AO‟s case is that there is no business connection between the assessee and M/s. Pacific Industries Ltd. Even then, there cannot be any addition towards notional interest. It is trite law that only real income should be brought to tax as has been held in the case of CIT Vs. Shoorji Vallabhdas and Co. 1962 (3) TMI 6 - SUPREME COURT - Hence, we find that the ld CIT(A) had rightly deleted the addition. Assessee appeal allowed.

Summary

Issues Involved:
1. Deletion of addition on account of share capital and share premium.
2. Deletion of addition on account of notional interest on interest-free loan.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Share Capital and Share Premium:

The revenue contested the deletion of an addition of Rs. 5,17,50,000/- made by the Assessing Officer (AO) on account of share capital and share premium. The AO observed that the assessee company, incorporated on 17.02.2011, had no business activity during the year under consideration or the preceding year. The sole income source was interest on fixed deposits. During the year, the assessee issued 103500 equity shares at a premium of Rs. 490 per share, collecting Rs. 5,17,50,000/-. The AO noted that these funds were used to invest in Geetanjali Investech Holdings India Pvt. Ltd. and to provide an interest-free advance of Rs. 1,48,00,000/- to Pacific Industries Ltd. The AO concluded that the share capital and premium received were accommodation entries, treating the amount as unexplained cash credit under Section 68 of the Income-tax Act, 1961.

Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee provided additional evidence, including share application forms, PAN details, bank statements, income tax returns, and audited financial statements of the investors. The CIT(A) accepted these additional evidences and sought a remand report from the AO, who reiterated his initial findings without addressing the merits of the documents. The CIT(A), after considering all documents and submissions, concluded that the assessee had discharged its onus under Section 68 by proving the identity, creditworthiness of the parties, and genuineness of the transactions. The CIT(A) observed that the AO failed to point out any specific deficiencies in the documents provided by the assessee. Consequently, the CIT(A) deleted the addition made by the AO.

The Tribunal agreed with the CIT(A)'s findings, noting that the assessee had provided comprehensive documentation proving the identity and creditworthiness of the investors and the genuineness of the transactions. The Tribunal emphasized that the primary onus was on the assessee, which had been duly discharged, shifting the burden of proof to the AO. The Tribunal also noted that the proviso to Section 68 requiring proof of the source of the source was introduced from AY 2013-14 and was not applicable to the year under consideration. Thus, the Tribunal upheld the deletion of the addition made under Section 68.

2. Deletion of Addition on Account of Notional Interest on Interest-Free Loan:

The AO added Rs. 22,20,000/- on account of notional interest on an interest-free loan of Rs. 1.48 crores given by the assessee to Pacific Industries Ltd. The AO argued that there was no business connection between the assessee and Pacific Industries Ltd. However, the CIT(A) deleted this addition, stating that the AO's addition was based on notional interest without any support from the provisions of the Act. The Tribunal upheld the CIT(A)'s decision, citing the principle that only real income should be taxed, as established by the Supreme Court in CIT Vs. Shoorji Vallabhdas and Co. (46 ITR 144 SC).

Conclusion:

The Tribunal dismissed the revenue's appeal in ITA No. 6213/Del/2018, upholding the CIT(A)'s deletion of additions on account of share capital, share premium, and notional interest. The decision in ITA No. 6213/Del/2018 was applied mutatis mutandis to ITA No. 6396/Del/2018, leading to the dismissal of both appeals by the revenue.