2018 (7) TMI 214 - AT - Income Tax

Tribunal affirms deletion of share application money addition & denies benefit under Income Tax Act

The Tribunal upheld the Commissioner of Income Tax (Appeals) decision to delete the addition of share application money, as the assessee provided ... Unexplained cash credits - addition of share application money as the assessee failed to establish the identity, creditworthiness and genuineness of the transaction - CIT-A deleted addition - Held that:- Assessee in this case has duly submitted all the necessary details in respect of the share application received which included name, address, company incorporation details, share application details, balance sheets, PAN, bank statements, acknowledgement of income tax return filed and confirmation from the parties. The Assessing Officer has not found any fault in these submissions except that he wanted to verify the details by asking the assessee to produce the promoter/director of these companies. The assessee has duly discharged its onus and no onus was cast on the assessee in the impugned assessment year to produce the persons or the books from the investment companies. The requirements of enquiry and obtaining explanation from the person making the investment in these circumstances have been brought into the statute books by amendment to section 68 to be prospective as they were effective only from 01.04.2013. Admittedly, the present assessment year being assessment year 2010-11, the Assessing Officer was not justified to take up the issue of obtaining explanation from the Directors/promoters of the investing companies. - Decided in favour of assessee. Business income taxable u/s. 28(iv) - income accrued to the assessee u/s. 28(iv) - assessee had made investment in the shares of PPSL at a discounted rate as PPSL had issued shares to few other entities and individuals at higher rate during the same period - Held that:- In the opinion of the Assessing Officer the benefit u/s. 28(iv) accrues. In this regard, we are of the opinion that while question of benefit u/s. 28(iv) of the Act accrues or not, will arise only if there is in fact any benefit. The above facts, that the said company (PPSL) was continuously incurring losses and has huge accumulated losses clearly indicate that the price, at which it was purchased cannot be said to be understated. Hence, there is no question of any kind of gain arising in purchase of these shares at the stated price above. Assessee is the purchaser of the share as investment and there is no incident that has taken place during the current accounting year which can be said to lead to any income accrued or arisen during the year. If at all the assessee transfers the shares then the probable benefit or profit, if any, in question can be brought to tax in those particular years as long term or short term capital as the case may be. In this regard, from a reading of section 28(iv) of the Act and the corresponding amendment in section 2(24) it is clear that even when the assessee purchases goods or assets at a price lower than the market price, under whatever circumstances the same cannot be brought to tax u/s. 28(iv). The assessee has clearly submitted that there is no business relationship as such between these parties. However, the Assessing Officer has disbelieved these submissions by generally referring to an enquiry which had revealed that some group companies have given corporate guarantees to PPSL for term loan. These unsubstantiated claims without specific finding about the name of the entity involved cannot be said to be giving rise to a business relationship among the parties. The assessee has simply purchased some shares of a loss making company at less than the face value from third parties. The assessee has not sold those shares and obtained any benefit of any kind whatsoever. Hence, the addition u/s. 28(iv) is not at all justified - Decided in favour of assessee. Issues Involved:1. Deletion of addition of share application money.2. Addition under Section 28(iv) of the Income Tax Act for shares purchased at a discounted rate.Issue-Wise Analysis:1. Deletion of Addition of Share Application Money:The Revenue appealed against the deletion of the addition of share application money by the Commissioner of Income Tax (Appeals) (CIT(A)). The Assessing Officer (AO) had added back the share application money as unexplained cash credit under Section 68 of the Income Tax Act, citing the assessee's failure to establish the identity, creditworthiness, and genuineness of the transaction. The AO noted that despite issuing summons under Section 131, the directors of the investment companies were not produced, and the letters returned unserved. The AO relied on the Delhi High Court decision in CIT vs. Globus Securities & Finance Pvt. Ltd. [2014] to support his conclusion.Upon appeal, the CIT(A) noted that the assessee had submitted necessary documents such as PAN cards, bank statements, certificates of incorporation, and income tax returns to establish the identity and creditworthiness of the investors. The CIT(A) obtained a remand report and found that the AO had not rebutted the assessee's assertions nor provided evidence that the investment companies were engaged in providing accommodation entries. The CIT(A) concluded that the assessee had furnished clear evidence to establish the identity and creditworthiness of creditors and deleted the addition.The Tribunal upheld the CIT(A)'s decision, noting that the assessee had discharged its onus by providing documentary evidence. The Tribunal referred to various case laws, including CIT vs. Gagandeep Infrastructure (P.) Ltd. [2017] and CIT vs. Orchid Industries (P.) Ltd. [2017], which held that the proviso to Section 68 introduced by the Finance Act, 2012, was prospective and not applicable to the assessment year in question. The Tribunal found no infirmity in the CIT(A)'s order and upheld the deletion of the addition.2. Addition under Section 28(iv) for Shares Purchased at a Discounted Rate:The AO added an amount under Section 28(iv) of the Income Tax Act, considering the benefit arising from the purchase of shares of Purti Power Sugar Limited (PPSL) at a discounted rate. The AO held that the assessee enjoyed a benefit within the meaning of Section 28(iv) as the shares were purchased at a price lower than the market price. The AO noted that there was a business relationship between the assessee and PPSL, as many group companies had given corporate guarantees to PPSL.The assessee appealed, arguing that the shares were purchased from third-party companies not related to PPSL or the assessee, and the transactions were of a capital nature, not attracting Section 28(iv). The CIT(A) agreed with the assessee, citing various judicial pronouncements, including ITAT decisions in Softnet Traders & Consultants and DP World (P) Ltd. vs. DCIT, which held that Section 28(iv) could not be applied to such transactions. The CIT(A) noted that the assessee had made investments in shares at a price reflecting the company's financial condition and accumulated losses.The Tribunal upheld the CIT(A)'s decision, noting that the assessee had purchased shares from third parties at a price justified by PPSL's financial condition. The Tribunal found that no benefit had accrued to the assessee within the meaning of Section 28(iv) and that any potential benefit would arise only upon the transfer of shares. The Tribunal concluded that the addition under Section 28(iv) was not justified and upheld the CIT(A)'s order.In conclusion, the Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on both issues.