2022 (11) TMI 717 - AT - Income Tax

Addition u/s 68 - unexplained share capital and share premium - non compliance to summons issued u/s. 131 of the Act or non appearance of the directors of the subscribing companies before the AO - nature and source of application money received were not furnished and even proved before the AO nor any remand report was called for by ld. CIT(A) - CIT(A) allowed the appeal of the assessee by holding that the assessee has proved genuineness of transactions and creditworthiness of the investors - HELD THAT - Non compliance to summons issued u/s. 131 of the Act or non appearance of the directors of the subscribing companies before the AO can not be basis for making addition as the assessee has filed all the necessary documents before the authorities below proving the identities, creditworthiness of the investors and genuineness of the transactions. The case of the assessee is squarely covered by the decisions of Crystal Networks Pvt. Ltd. 2010 (7) TMI 841 - KOLKATA HIGH COURT wherein it has held that where all the evidences were filed by the assessee proving the identity and creditworthiness of the loan transactions, the fact that summon issued were returned un-served or no body complied with them is of little significance to prove the genuineness of the transactions and identity and creditworthiness of the creditors. Assessee has furnished all the evidences proving identity and creditworthiness of the investors and genuineness of the transactions but AO has commented on these evidences filed by the assessee. Under these facts and circumstances and considering underlying facts in the light of ratio laid down in the decisions as discussed above, we are inclined to uphold the order of Ld. CIT(A) by dismissing the appeal of the revenue.

Summary

Issues Involved:
1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in holding that the genuineness and creditworthiness of shareholders were proved without seeking a remand report from the Assessing Officer (AO).
2. Whether the CIT(A) was correct in deleting the addition of Rs. 3,15,00,000 made by the AO under Section 68 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Genuineness and Creditworthiness of Shareholders:
The revenue contended that the CIT(A) erred in law by holding that the genuineness and creditworthiness of shareholders were proved without seeking a remand report from the AO. The AO had added the entire share capital and share premium of Rs. 3,15,00,000 to the income of the assessee on the grounds that the genuineness and creditworthiness were not proved, as the summons issued under Section 131 of the Act to the directors of the investing companies remained non-complied with.

In the appellate proceedings, the CIT(A) found that the assessee had furnished all necessary details such as share application forms, board resolutions, bank statements, PAN cards, income tax return acknowledgments, and audited accounts. The CIT(A) noted that the AO did not find any anomalies in these details and did not make any adverse comments or conduct further inquiries. The CIT(A) concluded that the identity and creditworthiness of the shareholders and the genuineness of the transactions were established, and thus, the addition of Rs. 15,00,000 from the directors of the appellant company was directed to be deleted. For the remaining Rs. 3,00,00,000 raised from nine shareholder companies, the CIT(A) found that the shareholders had substantial creditworthiness, and the transactions were genuine, being conducted through banking channels.

2. Deletion of Addition under Section 68:
The CIT(A) deleted the addition of Rs. 3,15,00,000 made by the AO under Section 68 of the Act. The CIT(A) observed that the appellant had discharged its initial onus by providing sufficient evidence, and the AO failed to rebut the claim of the appellant. The CIT(A) relied on the decision of the Hon'ble Jurisdictional High Court in CIT vs. Dataware Ltd., which held that the burden shifts to the department to establish the lack of creditworthiness once the assessee furnishes the names and addresses of the alleged creditors.

The revenue argued that the CIT(A) admitted new evidence not before the AO and decided the issue without calling for a remand report. The AO's main contention was that the shares were issued at a high premium without justification, and the non-compliance with summons by the directors of the investor companies raised doubts about the transactions.

The tribunal, after hearing the rival submissions and perusing the material on record, upheld the order of the CIT(A). It noted that the CIT(A) conducted a detailed examination of the evidence and found that the genuineness of the transactions and the creditworthiness of the investors were fully proved. The tribunal emphasized that issuing shares at a high premium is a business decision and cannot be questioned, especially since Section 56(1)(viib) of the Act, which addresses this issue, was effective from the assessment year 2013-14. The tribunal also highlighted that non-compliance with summons under Section 131 or non-appearance of directors cannot be grounds for making an addition if the necessary documents proving identity, creditworthiness, and genuineness are provided.

The tribunal referred to the decisions of the Hon'ble Calcutta High Court in Crystal Networks Pvt. Ltd. vs. CIT and the coordinate bench in ITO vs. M/s. Cygnus Developers India Pvt. Ltd., which supported the view that non-compliance with summons does not negate the evidences provided. The tribunal concluded that the AO's addition was not justified and dismissed the revenue's appeal.

Conclusion:
The tribunal upheld the CIT(A)'s order, finding that the assessee had provided sufficient evidence to prove the genuineness and creditworthiness of the shareholders and the transactions. The appeal of the revenue was dismissed, and the addition of Rs. 3,15,00,000 under Section 68 was deleted.