2017 (5) TMI 683 - HC - Income Tax

Assessment of share capital contribution in terms of Section 68 - Proof of credit worthiness or the genuineness of the parties - Held that - The result of enquiries carried out by the department should reveal and satisfy transparently all parameters of section 68, concurrently. In the present case, the finding of fact is to the effect that neither the credit worthiness nor the genuineness of the parties has been established by the assessee. The detailed investigations carried out by the assessing officer establish the position that the contributors to share capital were persons of insignificant means and their credit worthiness to have made the contributions has not been established. The assessing authority had put the result of his enquiries to the assessee granting him opportunity to offer its explanations. The appellant however failed to establish the genuineness of the cash contributions as well as the capacity of the persons to have made such contributions in the first place. The findings of the fact arrived at by the tribunal are accepted and nothing has been placed on record to show that they are perverse. - Decided in favour of revenue.

Issues Involved:
1. Legality of the assessment of share capital contribution under Section 68 of the Income Tax Act.
2. Validity of the Assessing Officer's action in taxing the share capital despite alleged lack of opportunity and non-consideration of facts.

Detailed Analysis:

Issue 1: Legality of the Assessment of Share Capital Contribution under Section 68 of the Income Tax Act

The court examined whether the Tribunal was correct in law in concluding that the assessment of share capital contribution under Section 68 of the Act was valid. The assessing authority had noticed a significant increase in the share capital of the appellant during the financial year, amounting to ?49,74,000. Despite the appellant providing names and addresses of contributors, the assessing authority found discrepancies and concluded that neither the creditworthiness nor the genuineness of the transactions was established. The Tribunal upheld the assessing authority’s decision, noting the lack of evidence supporting the financial capacity of the creditors and the authenticity of the transactions.

The appellant relied on Supreme Court judgments in Commissioner of Income Tax Vs. Lovely Exports and CIT Vs. Steller Investment, arguing that no addition could be made under Section 68 for share capital contributions and that the Department should proceed against the shareholders directly. However, the court noted that these judgments were distinguishable on facts. In Lovely Exports, payments were made through banking channels, and contributors were assessed to tax, unlike in the present case where contributions were in cash, and contributors were not assessed to tax.

The court emphasized that Section 68 requires the assessee to establish the identity, creditworthiness of the creditor, and genuineness of the transaction. In this case, the appellant failed to prove the latter two conditions. The court concluded that the language of Section 68 does not exclude share capital contributions from its purview, and the appellant's broad interpretation was not acceptable.

Issue 2: Validity of the Assessing Officer's Action in Taxing the Share Capital Despite Alleged Lack of Opportunity and Non-Consideration of Facts

The appellant contended that the Assessing Officer’s action was invalid due to a lack of opportunity and non-consideration of facts. However, the court found that the assessing authority had conducted detailed investigations, summoned contributors, and recorded statements. Despite this, the appellant failed to provide satisfactory evidence of the creditworthiness and genuineness of the transactions. The court noted that the burden of proof under Section 68 was not discharged by the appellant, as the alleged contributors were found to be persons of insignificant means with no substantial evidence of their financial capacity to make such contributions.

The court referred to the Full Bench decision in Commissioner of Income Tax Vs. Sophia Finance Limited, which allowed the Income Tax Officer to inquire into the existence of shareholders and the validity of share capital issuance. The court also cited various High Court judgments supporting the view that the provisions of Section 68 apply to share capital contributions if the genuineness and creditworthiness are not established.

Conclusion:

The court dismissed the appeal, answering the substantial questions of law in favor of the Revenue. It upheld the Tribunal's findings that the appellant failed to establish the creditworthiness and genuineness of the share capital contributions. The detailed investigations by the assessing authority were deemed sufficient, and the appellant's failure to provide satisfactory explanations led to the affirmation of the addition under Section 68 of the Income Tax Act. The appeal was dismissed without costs.

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