Section 68 share capital additions fail when identity, creditworthiness and genuineness of investors are properly proved.

Share capital and share premium credits were held to be explained where the assessee established the identity, creditworthiness and genuineness of the share applicants with confirmations, returns, balance sheets and other supporting material. The assessee was a genuine operating manufacturing company and gave a commercial justification for issuing shares at premium. The investor companies were registered entities, responded to notices, and had adequate shareholder funds with explained source of funds. As the Revenue relied on suspicion and adverse inference without contrary evidence, the primary burden under section 68 was treated as discharged and the addition was deleted.

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Issues: Whether the addition made under section 68 of the Income-tax Act, 1961, in respect of share capital and share premium was justified when the assessee furnished the identity, creditworthiness and genuineness of the share applicants.

Analysis: The assessee was found to be a genuine operating company engaged in manufacturing activity and had given a commercial justification for the issue of shares at premium. The share applicants were registered entities, had responded to notices, and furnished confirmations, returns, balance sheets and other supporting documents. On the facts found, the investor companies had sufficient shareholder funds and the source of funds was also explained. The addition rested on suspicion and on an adverse inference without rebutting the material placed on record. Once the primary onus under section 68 was discharged, the burden shifted to the Revenue to bring cogent material to show that the credits were unexplained.

Conclusion: The addition under section 68 was not sustainable and was deleted.

Ratio Decidendi: Where an assessee proves the identity of share applicants, their creditworthiness and the genuineness of the share transaction by cogent material, and the Revenue fails to dislodge that evidence with contrary material, an addition under section 68 cannot be sustained merely on conjecture or suspicion.

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