2023 (5) TMI 1325 - AT - Income Tax

Assessee fails to prove identity and creditworthiness of share subscribers under Section 68

Balgopal Merchants Pvt. Ltd. Versus Income Tax Officer, Ward-10 (1), Kolkata.

The ITAT Kolkata upheld addition under Section 68 regarding share capital and premium received by the assessee company. The assessee failed to establish ... Addition u/s 68 - addition of entire Share Capital & Share Premium - no compliance from assessee by way of which identity, genuineness of the share subscribers and creditworthiness of the transactions can be established - Assessee made investment in land by raising share capital for which cost of land was very low and would fetch good sale price at high profits after its development, claimed ld. Counsel - HELD THAT:- As submitted that assessee had acquired 690.51 decimals of land area. There is nothing on record to demonstrate as to how these lands were acquired in terms of their conveyance deeds. In the written submissions furnished by assessee it is submitted that investment of assessee is in land and at the time of transactions and in view of huge quantity of land, cost of lands was very low but after the development of same, price of the same would be very high and profitable. As stated that “assessee is valuing investments at books value, whereas, the intrinsic or fair market value is much more. While issuing shares, fair market value of the shares has to be taken into account and the person paying the premium has factually benefitted from the purchase of shares at premium.” Assessee also submitted that in order to justify its fair market value had made an attempt to furnish the submissions before AO for which it is stated in the written submission “assessee had during the course of assessment, approached to AO and tried to provide the fair market value of the investment held which proves the reasonableness of the premium, but ld. AO was not interested to do so.” Ongoing through these submissions, we find them to be general and vague in nature and in no way establishes the identity, creditworthiness of the share subscribers and the genuineness of the transaction. It is difficult to comprehend the reason for the investment in the assessee company by the share subscribers when there is no track record for the assessee, this being the broken year and the very first year of incorporation. Preponderance of probabilities weighs in favour of Revenue when the fact on record is that shares have been issued on two consecutive dates, first being on 30/03/2012 to five individuals from whom no share premium has been charged and on the very next date on 31/03/2012, a hefty premium of Rs. 4,990/- has been charged from two share subscribing companies. It is also important to note in this case that none appeared before ld. AO to discharge the onus casted u/s 68 of the Act so as to enable the AO to make the necessary enquiries for establishing the identity and creditworthiness of share subscribers as well as genuineness of transactions. As also observed that the main object clause contained in the Memorandum of Association does not fall in line with the activity of land dealing claimed to have been undertaken by assessee during the year. Also, from perusal of financial statements of two share subscribing companies, it is observed that source of investment by these two companies are also from the share capital and share premium raised by them while issuing their own shares to other closely held companies. Further, the assessee itself has claimed that there is no noticeable business activity during the year. Thus assessee has failed to establish the basic ingredients of Section 68 of the Act - Decided against assessee. Issues involved:The issues in this case involve violation of principles of natural justice, addition of share capital and share premium as unexplained cash credit under section 68 of the Income Tax Act, and the failure to establish the basic requirements of identity, creditworthiness, and genuineness of transactions.Violation of Principles of Natural Justice:The appeal raised concerns regarding the violation of principles of natural justice by the Learned Commissioner of Income Tax (Appeals) - 15. The appellant argued that the order passed was unreasonable, uncalled for, and bad in law, rendering it void ab-initio. However, the appeal was dismissed by the Tribunal.Addition of Share Capital and Share Premium:The case revolved around the addition of the entire share capital and share premium of Rs. 3,65,95,490 as unexplained cash credit under section 68 of the Income Tax Act. The Assessing Officer found discrepancies in the share capital raised by the assessee, particularly the hefty premium charged from two share subscribing companies without sufficient justification. Despite the appellant's submissions, the addition was sustained by the Assessing Officer and the Commissioner, leading to the dismissal of the appeal by the Tribunal.Failure to Establish Basic Requirements:The Tribunal observed that the assessee, a newly incorporated company without a proven track record, failed to establish the basic requirements of identity, creditworthiness of share subscribers, and genuineness of transactions. The main object clause of the company did not align with the claimed activities related to land dealing. Moreover, the lack of substantial evidence regarding the acquisition and valuation of land raised doubts about the legitimacy of the transactions. As a result, the Tribunal upheld the addition of the unexplained cash credit, dismissing the grounds taken by the assessee.This judgment highlights the importance of substantiating the source and legitimacy of funds raised through share capital and premium, especially for new entities without a track record. The decision underscores the significance of complying with legal requirements and providing concrete evidence to support financial transactions to avoid adverse implications under tax laws.