2013 (12) TMI 13 - HC - Income Tax

Issue of share capital and accommodation entries: investments treated as camouflage and revenue assessment sustained.

Issue concerned whether large inbound share subscriptions were genuine or mere camouflage/accommodation entries. The HC found concentrated, short-span ... Issue of share capital - camouflage transactions / accommodation entries - prove and establish the Identity and Creditworthiness of the share applicants - Genuineness of the transaction - Held that:- The Assessee company is a private limited company – The assessee company has issued share capital including premium of Rs.4,35,00,000/-, out of which only Rs.92,00,000/- was infused from the Directors/family members of the Directors. The remaining share capital had been infused from parties which were completely unrelated either to the Assessee or to any of its Directors - In a private limited company, normally the investment of shares is from parties or persons who are friends or relatives of Promoters/Directors – Later on these shares were transferred to directors of the company at a substantial loss - The entire investment happened during a short span of time and re-transfer of the shares to the Directors of the company also happened during a short span of few days - The modus operandi and the manner in which cash is deposited in a bank and then utilized by way of an account payee cheque for purchase of shares clearly establishes that the said transaction was a camouflage transaction - The Assessee failed to produce the persons who had invested towards share capital shows that these were people who were completely unrelated to the Assessee - All the entries were merely accommodation entries - It would not have been difficult in case of private company to produce persons who were investing substantial amount of money in the company towards share capital - The Assessee has not been able to discharge the initial onus and has not been able to establish the identity, creditworthiness of the share applicants and the genuineness of the transaction – Decided in favour of Revenue. Issues: (i) Whether the Income Tax Appellate Tribunal was correct in deleting the addition of Rs.3,43,00,000/- made by the Assessing Officer under Section 68 of the Income-tax Act, 1961 by treating the share subscriptions as genuine investments rather than accommodation entries.Analysis: The matter involved examination of (a) identity, (b) genuineness of the transaction, and (c) creditworthiness of the share subscribers as required by the legal tests under Section 68. Material placed on record by revenue included investigation-wing findings identifying a network of entry providers, bank account statements showing cash deposits followed by issuance of cheques to the assessee, statements implicating the entry operator group, failure to serve or produce multiple alleged subscribers and rapid purchase and resale of shares at steep discounts after allotment at high premiums. Precedents cited distinguished public-issue and bona fide private-placement scenarios where statutory share application records and successful verification may discharge the assessee's initial onus. Where incriminating material links the assessee with entry providers and the assessee fails to produce or make available subscribers for verification, mere production of PANs, income-tax returns or uniform affidavits is insufficient to discharge the onus. The surrounding facts here -- close timing of allotments, identical/serial affidavits, inability to summon subscribers, bank evidence of cash deposits routed into share payments, and resale back to promoters at a nominal price -- supported characterization as camouflage accommodation entries and warranted adverse inference and further inquiry by the revenue.Conclusion: The deletion of the addition of Rs.3,43,00,000/- under Section 68 is set aside and the addition is sustained in favour of the Revenue; the substantial question of law is answered in favour of the Appellant and against the Respondent-Assessee.