2019 (3) TMI 688 - AT - Income Tax

Addition u/s 68 - Share capital and premium money received from investor company as not genuinely doing any business but is providing the accommodation entries of share premium in garb of genuine business activity - receipt of accommodation entries - HELD THAT - Assessee has submitted all the necessary details in support of the share applicant and share premium receipt. The A.O. has not pointed out any defect in the documents. As a matter of fact, the A.O. has not even issued a notice u/s. 133(6) of the Act to the share applicant, if he had any doubt about the identity, genuineness and creditworthiness of the share applicant. In fact, the share applicant is the sister concerned of the assessee, from whom similar share application with premium were received in the earlier year. The identical addition in that year by the A.O. was deleted by the CIT(A) and confirmed by the ITAT. It is not the case that the Hon ble Jurisdictional High Court has reversed the said ITAT decision. The facts in the present Assessment Year are identical as in the earlier year. Assessment of the share applicant has also been completed u/s. 143(3) of the Act and no adverse comment has been made by the A.O. in that case. The balance sheet of the share applicant shows ample source of funds. Hence, the A.O. s negative observation about share applicant s availability of funds is factually incorrect. The funds obtained by the share applicant appearing in its balance sheet cannot be disregarded. No adverse observation is noted in the assessment order of the said share applicant. Hence, the veracity of share applicant s fund position remains undoubted by the A.O. of the said concern itself. It is not the case that the A.O. had wanted some information from the share applicant and which the assessee or the share applicant failed to provide. - decided in favour of assessee Disallowance u/s 14A r.w.r. 8D - sufficiency of non interest bearing own funds - Held that - Submissions of the assessee with regard to the availability of the non interest bearing own funds being more than investments made are found to be correct. Hence, no disallowance is justified with regard to disallowance u/s. 8D(2)(ii). As regards the disallowance u/s. 8D(2)(iii) is concerned, the A.O. has computed the disallowance of ₹ 87,649/-. The ld. CIT(A) has sustained a disallowance of ₹ 50,380/- out of exempt income of ₹ 2,51,899/-. When this is considered under the context of the fact that majority of the shares are held as stock-in-trade and the fact that not all the investments have yielded exempt income during the year, the sustenance of the addition by the ld. CIT(A) meets the ends of justice - Decided against revenue

Summary

Issues Involved:

1. Deletion of addition made under Section 68 of the Income Tax Act, 1961 concerning share capital and share premium.
2. Estimation of disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68:

The Revenue challenged the deletion of ?4,30,00,000/- added under Section 68 of the Income Tax Act, 1961, concerning share capital and share premium. The Assessing Officer (AO) had treated the share capital and premium received from M/s Illusion Securities Pvt. Ltd. as unjustified and from undisclosed sources, adding the amount to the assessee's total income. The AO inferred that the assessee had taken accommodation entries from its associate concern and failed to prove the nature and source of the funds.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] noted that the assessee had provided comprehensive documentation to establish the identity, genuineness, and creditworthiness of the shareholder, including PAN card, CIN Master Data, Certificate of Incorporation, Share Application Forms, Board Resolution, Confirmation of Account, Balance Sheet, Bank Statements, and Assessment Order under Section 143(3) for the same assessment year. The CIT(A) held that the AO had not brought any contrary evidence to disprove the transaction or the involvement of unaccounted money and had not issued any notice under Section 133(6) to verify the source of funds. The CIT(A) concluded that the share premium received is a capital receipt and cannot be taxed under Section 68. The CIT(A) relied on several judicial precedents, including the Bombay High Court's decisions in Vodafone India Services Pvt. Ltd., Gagandeep Infrastructure Pvt. Ltd., and Green Infra Ltd., to support the deletion of the addition.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s order, noting that the assessee had submitted all necessary details to establish the creditworthiness, identity, and genuineness of the transaction. The ITAT observed that the AO had disregarded these documents solely based on the share premium's valuation, which was obtained in an earlier year. The ITAT referenced its own decision in the assessee's case for an earlier assessment year, where a similar addition was deleted, and confirmed that the facts and circumstances were identical. The ITAT also noted that the assessment of the share applicant (M/s Illusion Securities Pvt. Ltd.) had been completed under Section 143(3) without any adverse comment, confirming the genuineness of the transaction. Consequently, the ITAT upheld the deletion of the addition under Section 68.

2. Estimation of Disallowance under Section 14A read with Rule 8D:

The AO had disallowed ?4,01,988/- under Section 14A read with Rule 8D, comprising ?3,14,339/- under Rule 8D(2)(ii) and ?87,649/- under Rule 8D(2)(iii), against the assessee's exempt income of ?2,51,899/-. The assessee argued that the investments were held as stock-in-trade and not as investments, and that the interest income should be considered on a net basis.

The CIT(A) noted that the majority of tribunals and courts had held that disallowance under Rule 8D(2)(ii) and (iii) is not applicable to stock-in-trade. The CIT(A) observed that the assessee had not identified direct expenses to earn the dividend income and that the computation under Rule 8D resulted in nil disallowance due to mathematical concepts. The CIT(A) estimated a disallowance of 20% of the exempt income, amounting to ?50,380/-, and provided relief of ?3,51,608/- to the assessee.

The ITAT upheld the CIT(A)'s order, noting that the assessee had sufficient non-interest-bearing own funds to cover the investments, as per the Bombay High Court's decision in Reliance Utilities and Power Ltd. The ITAT found that the CIT(A)'s estimation of disallowance at 20% of the exempt income was fair and justifiable, considering the investments held as stock-in-trade and the fact that not all investments yielded exempt income during the year.

Conclusion:

The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of the addition under Section 68 and the estimation of disallowance under Section 14A read with Rule 8D. The ITAT emphasized the importance of documentary evidence in establishing the genuineness, identity, and creditworthiness of transactions and the need for a fair and justifiable estimation of disallowances.