2019 (5) TMI 1439 - AT - Income Tax

Tribunal Upholds CIT(A) Decision on Unexplained Cash Credit

DCIT-9 (3) (2), Mumbai Versus M/s. Gladiolus Property & Inv. Pvt. Ltd.

The Tribunal upheld the CIT(A)'s decision to delete the addition made under Section 68 of the Income Tax Act for unexplained cash credit. The Tribunal ... Addition u/s.68 - unexplained cash credit - as per AO assessee has failed to discharge the burden to substantiate the creditworthiness of the shares investors and genuineness of the transactions - CIT-A deleted the addition - HELD THAT:- In the present case, so far as the identity of the investors, their creditworthiness & genuineness of the transactions is concerned, we find that all the investors were having Permanent Account number and were duly filing their Income Tax Returns. The audited financial statements were placed on record. The share applicants had confirmed the investments. It is the finding of Ld. AO that the investment in the shape of share capital as well as share premium was made by these entities out of their respective unsecured loan / reserves / other liabilities / share premium account which contradicts / negate the stand of AO that the entities were showing meagre profits and had no source to make the stated investments. Nothing on record suggest that any money got exchanged between the assessee and the investor entities which flew back in the shape of share capital / share premium. Another pertinent observation to be made is that as per Ld. AO’s finding, the impugned AY was the initial year of business operation of the assessee company and therefore, it is difficult to accept that the assessee accumulated huge unaccounted money which was ploughed back in the shape of share capital / share premium. It is undisputed fact that the transactions have taken place through banking channels which is evident from the bank statements of the assessee as well as share applicants as placed on record. The entirety of facts would convince us to form an opinion that the assessee was successful in establishing the fulfilment of primary condition of Section 68. Justification of share premium - We find that the assessee, in its investment note, adopted Discounted Cash Flow method to arrive at the valuation of shares. Be that as the case may be, we are of the considered opinion that quantum of premium was matter between assessee company issuing the shares and investor entities and the payment of high premium, in itself, could not be the basis of making addition in assessee’s hand unless there was any illegality or restriction, under law, towards receipt of high share premium. Our view is in line with the decision of Pr.CIT Vs. Chain House International Pvt. Ltd. [2019 (2) TMI 1213 - SC ORDER] wherein it has, interalia, been held that It was the prerogative of the Board of Directors to decide the quantum of premium and it was the wisdom of the shareholders whether they wanted to subscribe to the shares at such a premium. Another aspect of this is that the provisions of Section 56(2)(viib) were applicable only with effect from 01/04/2013 and the same were not applicable during impugned AY. - Decided in favour of assessee. Issues Involved:1. Deletion of addition made under Section 68 of the Income Tax Act for unexplained cash credit.2. Assessment of the genuineness, identity, and creditworthiness of share investors.3. Validity of high share premium in the first year of operation.Issue-Wise Detailed Analysis:1. Deletion of Addition Made Under Section 68:The revenue contested the order of the Commissioner of Income-Tax (Appeals) [CIT(A)] which deleted the addition of Rs. 13.25 Crores made under Section 68 for unexplained cash credit. The original return of income was filed at Rs. 2.38 Crores, processed under Section 143(1). The reassessment proceedings were initiated based on information received about the receipt of Share Premium amounting to Rs. 12.58 Crores. The assessee provided details such as Name, Address, PAN, financials, Share Application forms, Bank statements, and Board Resolutions. Notices under Section 133(6) were issued to three share allottees, but they were returned unserved. The Assessing Officer (AO) concluded that the identity and genuineness of the transactions could not be established and added the amount to the income of the assessee under Section 68.2. Assessment of Genuineness, Identity, and Creditworthiness of Share Investors:The CIT(A) upheld the reassessment proceedings but examined the claims on merits. The assessee argued that it had fulfilled the primary ingredients of Section 68 by providing substantial documentary evidence. The CIT(A) concurred with the assessee, noting that the share capital and premium came from existing shareholders who confirmed their contributions. The assessee provided PAN cards, bank statements, balance sheets, and Share Application Forms of shareholders. The transactions were through banking channels, and no cash transactions were involved. The CIT(A) relied on judicial precedents, including CIT Vs. Lovely Exports (P) Ltd. and CIT Vs. Gagandeep Infrastructure P. Ltd., to conclude that the assessee had discharged its burden under Section 68.3. Validity of High Share Premium in the First Year of Operation:The AO doubted the high share premium due to the company's poor Earnings Per Share (EPS) and lack of dividends. However, the CIT(A) observed that the share premium was justified through a valuation report and that the premium amount was a matter between the assessee and the investors. The CIT(A) concluded that the AO's inferences were not justified and that the primary onus was on the revenue to prove that the assessee's unaccounted money was routed back as share capital/premium. The CIT(A) noted that the AO did not conduct sufficient investigations to disprove the assessee's claims.Separate Judgments:The CIT(A) referenced several judicial pronouncements to support the decision, including:- Oasis Hospitality Pvt. Ltd. Vs. CIT, Hon’ble Delhi High Court- CIT Vs. Creative World Telefilms Ltd., Hon’ble Bombay High Court- CIT Vs. P. Mohankala, Hon’ble Supreme Court- CIT Vs. Stellar Investment Ltd., Hon’ble Delhi High Court- CIT Vs. Gangeshwari Metal Pvt. Ltd., Hon’ble Delhi High CourtConclusion:The Tribunal upheld the CIT(A)'s order, noting that the assessee had provided sufficient documentary evidence to establish the identity, creditworthiness, and genuineness of the transactions. The Tribunal emphasized that no additions could be made based on suspicion or conjectures. The Tribunal distinguished the case from the recent judgment of the Hon’ble Apex Court in Pr.CIT Vs. NRA Iron & Steel Pvt. Ltd., noting that extensive inquiries were not conducted in the present case. The Tribunal found that the CIT(A) was justified in deleting the addition under Section 68 and dismissed the revenue's appeal.Order Pronounced:The revenue’s appeal was dismissed, and the order was pronounced in the open court on 16/05/2019.