2024 (1) TMI 1067 - AT - Income Tax

Addition u/s 68 - AO was not satisfied with the source of source aspect of the investors - assessee has failed to prove the credit worthiness and genuineness of parties who have paid the loan amount to the share subscribers of assessee company - CIT(A) deleted addition - HELD THAT - When the order of learned CIT(A) is considered it establishes that on account of exempt income declared from the sale of equity shares of the alleged penny stock of SCTL, no addition was made in the hands of Dinesh Gupta HUF in assessment u/s 143(3) or in the hands of Rajesh Gupta HUF. The addition was made in the hands of Dinesh Gupta in assessment u/s 143(3). However, the same was deleted by learned CIT(A)-26, New Delhi and the order stands sustained 2021 (4) TMI 258 - ITAT DELHI . Lastly, there was no allegation of Renu Gupta having source arising out of disinvestment of alleged penny stock and primarily her source was refund of loan in certain companies or sale of equity shares of Mangal Kalas Services Pvt. Ltd. Thus, learned CIT(A) has not erred in not finding substance in the conclusion of learned AO that the source of source is tainted. CIT(A) has taken into consideration all the relevant information about the identity of the investors, their bank statements, another financials which were duly filed to give details of the financial credibility of the investors. In the absence of any allegation of any cash deposits in the bank accounts of the investors so as to draw inference that it was assessee s own money which was accounted back by the investors, AO certainly had fallen in error in stretching the principles of test of improbability too far to hold that the transactions were created to mask the apparent as real. We are of the considered opinion that merely because of some sort of control of Gupta family into companies transacting in the alleged penny stock cannot be basis to question the source of source in the hands of the assessee company without any direct evidence or circumstantial evidence giving a complete link of circumstances. Mere inference of Ld. AO, out of valid and reported transactions to question the source of source for addition u/s 68 could not have been sustained by learned CIT(A). Decided against revenue.

Summary

Issues Involved:
1. Whether the funds received in the form of share premium are from disclosed sources and have been correctly offered for tax.
2. Whether the assessee has proven the identity, creditworthiness, and genuineness of the share subscribers.
3. Whether the transactions involving the sale of shares of Shilpi Cables Technologies Ltd. (SCTL) were genuine or sham transactions.
4. Whether the source of source of the investors' funds was adequately explained.

Summary:

Issue 1: Funds Received as Share Premium
The assessee, a closely held company, raised share capital and premium from its directors and their relatives. The shares were issued at Rs. 110/- per share, including a Rs. 100/- share premium. The Assessing Officer (AO) added Rs. 42,85,00,000/- as unexplained income under Section 68 of the Income-tax Act, 1961, questioning the source of the share premium.

Issue 2: Identity, Creditworthiness, and Genuineness of Share Subscribers
The assessee provided documentary evidence, including share application forms, confirmations, affidavits, bank statements, and income tax returns of the shareholders. The First Appellate Authority (FAA) accepted these documents, concluding that the assessee discharged its onus under Section 68 of the Act. The shareholders were existing directors or their relatives, and the entire subscription was received through account payee cheques or RTGS.

Issue 3: Transactions Involving SCTL Shares
The AO suspected the transactions involving SCTL shares were sham, based on the trading data and the nature of the income declared by the shareholders. However, the FAA found that the exempt income from the sale of SCTL shares was duly disclosed and accounted for in the shareholders' returns. The FAA noted that in the case of Dinesh Gupta HUF and Rajesh Gupta HUF, no additions were made regarding the exempt income from SCTL shares in their assessments. In the case of Dinesh Gupta, the addition was deleted by the CIT Appeals and upheld by the ITAT.

Issue 4: Source of Source of Investors' Funds
The FAA found that the assessee explained the source of funds in the hands of the shareholders, including the source of source. The AO's adverse inference was based on suspicion without specific adverse material. The FAA concluded that the assessee had discharged its burden of proof under Section 68 of the Act, and the AO failed to bring any material to prove non-genuineness or non-creditworthiness of the investors.

Conclusion:
The FAA deleted the addition of Rs. 42,85,60,000/- made by the AO under Section 68 of the Act, finding that the assessee had adequately explained the nature and source of the funds received. The Revenue's appeal was dismissed, as the grounds lacked substance and the FAA's findings were upheld.