2021 (5) TMI 540 - AT - Income Tax

Addition u/s 68 - assessee company received share capital and share premium as unexplained - assessee unable to prove the identity, genuineness and credit worthiness of the subscribers - HELD THAT - We find that the entire share capital and premium has been received through account payee cheques drawn on the account of shareholders who are all independent assessees and have confirmed the transaction of having made investments in the assessee company and have also filed their respective bank accounts and have explained the nature and source of funds in their bank account out of which share subscription including premium has been paid to the assessee company. These evidences cannot be brushed aside lightly and preponderance of human probability cannot get precedence over these evidences galore. AO has not doubted the share premium of ₹ 490/- per share as the same is supported by the valuation report as per the I.T. Rules. By disbelieving the source of source being long term capital gain from the sale consideration of shares of Shital Leasing and Finance Ltd and Shilpi Cable Technologies, the AO cannot justify the addition in the hands of the assessee company. As mentioned elsewhere, any addition which deserved to be made should have been made in the hands of the share applicants who have shown their source of source as sale of shares of these companies or alleged accommodation entries. Whether the assessee has discharged the burden cast upon it by the provisions of section 68 of the Act or not is purely a question of fact and has to be decided on the facts of each case and, therefore, no judicial decision has been considered on the peculiar facts of the case in hand. Additions made by the AO on the basis of general observations and without drawing any adverse inference in the hands of the individual taxpayers share applicants such additions based on surmises and conjectures cannot be sustained. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of share capital and share premium received by the assessee.
2. Compliance with Section 68 of the Income Tax Act regarding identity, genuineness, and creditworthiness of share subscribers.
3. Treatment of share premium and source of funds in the hands of shareholders.
4. Appropriateness of additions made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

Issue-wise Detailed Analysis:

1. Validity of Share Capital and Share Premium Received by the Assessee:
The assessee company, engaged in real estate, issued fully and partly paid equity shares at a premium during the year under consideration, receiving a total of ?1,80,21,000 as share capital and ?88,30,29,000 as share premium. The AO questioned the genuineness of these transactions, suspecting them to be dubious entries meant to channelize unaccounted funds. The AO noted that some shares were forfeited in the subsequent year, which further raised doubts about the genuineness of the share capital and premium.

2. Compliance with Section 68 of the Income Tax Act:
The AO invoked Section 68, requiring the assessee to prove the identity, genuineness, and creditworthiness of the subscribers. The assessee provided extensive documentary evidence, including PAN copies, share applications, confirmations, share certificates, ITR acknowledgments, affidavits, bank statements, and source of source documents. Despite these submissions, the AO made general observations about the dubious nature of the transactions, citing involvement of entry operators and shell companies.

3. Treatment of Share Premium and Source of Funds in the Hands of Shareholders:
The AO's primary contention was that the share premium and capital were routed through circuitous transactions involving shell companies and entry operators. The AO argued that the assessee did not have a running real estate business and relied on interest income from FDs, questioning the capital appreciation claimed by investor companies. The AO applied the test of human probability, supported by the Supreme Court's decision in Sumati Dayal, to justify the addition of ?88,30,29,000.

4. Appropriateness of Additions Made by the AO and Upheld by the CIT(A):
The CIT(A) partly confirmed the AO's additions for two share applicants, Shri Anand Gupta, HUF, and Shree Sanchit Gupta, while deleting other additions. The tribunal found that the assessee had discharged its burden of proof by providing comprehensive documentary evidence. The tribunal emphasized that any addition should be made in the hands of the individual shareholders if they failed to explain their source of funds, not in the hands of the assessee company. The tribunal criticized the AO for making general observations without specific discrepancies in the assessee's submissions.

Conclusion:
The tribunal concluded that the assessee had established the source and source of the source of the share capital and premium. The AO's general observations and suspicions were insufficient to justify the additions. The tribunal allowed the assessee's appeal and dismissed the revenue's appeal, stating that the additions were based on surmises and conjectures without drawing adverse inferences in the hands of individual taxpayers. The tribunal also noted that the CIT(A) erred in sustaining the additions for Shri Anand Gupta, HUF, and Shree Sanchit Gupta without any basis. The order was pronounced in the open court on 26.04.2021.