2020 (8) TMI 714 - AT - Income Tax

Tribunal Upholds Rs. 4.86 Crore Addition u/s 68 for Lack of Proof on Investor Entities' Creditworthiness & Genuineness.

ITO Ward 5 (3), New Delhi Versus KNS Realtors Pvt. Ltd. (M/s KMS Realtors P. Ltd.)

The Tribunal upheld the AO's decision to restore the addition of Rs. 4,86,45,500 under Section 68 of the Income Tax Act, 1961, concluding that the ... Addition u/s 68 - Unexplained share capital receipt - CIT(A) held that since no business activities are carried out by the assessee company and the assessee company could not earn any income from many of its source of income or any business activities carried by it, the share application money brought by the above investor companies cannot be considered as assessee’s own money earned by it by any source and the provisions of section 68 of the Act cannot be invoked - HELD THAT:- The way of acquaintance of these share applicant entities with the affairs of the assessee company, the facts that motivated these entities to purchase the shares of the assessee company at a huge premium, particularly when the assessee did not commence the business and does not possess any assets of considerable net worth, the measures of security for such investment obtained by such entities, the modus operandi of the agreement between the assessee and such entities - all these things will have to be get clarified, not by papers, but by examination of the persons who run and manage these entities. Orders of the authorities below reveal that the assessee has not complied with the requirements of the learned Assessing Officer in the exercise of forming satisfaction as to the creditworthiness of the share applicants or the genuineness of the transaction. Mere paperwork by the assessee does not take the authorities anywhere, when the learned Assessing Officer suspected the real existence of the entities that applied and paid for share application and share premium and insisted that a higher degree of proof is required in that respect. In the circumstances of the case, in view of the decisions of the Hon’ble Apex Court in the case of PCIT vs. NRA Iron and Steel (P) Ltd [2020 (2) TMI 273 - SC ORDER] we are of the considered opinion that the action of the learned Assessing Officer was legal and the inference drawn by him that the assessee had routed their own money in the books of accounts through the conduit of investor companies is justified. On this premise, we agree with the Revenue and while setting aside the impugned order, restore the addition made by the learned Assessing Officer under section 68 - Decided against assessee. Issues Involved:1. Deletion of addition under section 68 of the Income Tax Act, 1961.2. Justification for issuance of shares at a premium.3. Verification of the genuineness of transactions and creditworthiness of share applicants.4. Compliance with procedural requirements by the assessee.5. Legal precedents and their applicability.Issue-wise Detailed Analysis:1. Deletion of Addition under Section 68 of the Income Tax Act, 1961:The Revenue challenged the deletion of an addition of Rs. 4,86,45,500/- made by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961. The AO had added this amount to the income of the assessee, M/s KNS Realtors Private Limited, on the grounds that the creditworthiness of the share applicants and the genuineness of the transactions were not proven. The AO conducted inquiries and found discrepancies in the responses and documents provided by the assessee, leading to the conclusion that the share application money was the assessee's own funds routed through investor companies.2. Justification for Issuance of Shares at a Premium:The AO questioned the issuance of shares with a face value of Rs. 10/- at a premium of Rs. 475/- per share, given that the assessee company had not carried out any business activities and did not possess any significant assets. The AO noted that the financials of the investor companies did not justify such a high premium, and there were cash transactions in the bank accounts of the investor companies immediately before the investment.3. Verification of the Genuineness of Transactions and Creditworthiness of Share Applicants:The AO issued notices under sections 133(6) and 131 of the Act to verify the genuineness of the transactions and the creditworthiness of the share applicants. However, the summons issued to the parties were returned unserved, and the assessee failed to produce the directors of the investor companies despite promising to do so. The AO concluded that the assessee did not discharge the primary onus of proving the identity, creditworthiness, and genuineness of the transactions.4. Compliance with Procedural Requirements by the Assessee:The assessee produced confirmation letters, bank details, audited balance sheets, and income tax returns of the investor companies. However, the AO was not satisfied with these documents and insisted on examining the directors of the investor companies. The CIT(A) held that the AO should have made further inquiries with the respective Assessing Officers of the investor companies and that the failure to produce the directors should not be a ground for addition.5. Legal Precedents and Their Applicability:The Revenue cited several legal precedents, including the decisions of the Hon'ble Supreme Court in PCIT vs. NRA Iron and Steel (P) Ltd (2019) and the Hon'ble jurisdictional High Court in PCIT vs. NDR Promoters Pvt. Ltd. (2019), CIT vs. NR Portfolio Private Limited (2014), and CIT vs. Nova Promoters & Finlease (P) Ltd. These decisions emphasize the necessity of verifying the creditworthiness and genuineness of transactions, especially when there are doubts about the identity and financial capacity of the investors.Conclusion:The Tribunal concluded that the AO's action was justified and that the assessee failed to prove the creditworthiness and genuineness of the transactions. The Tribunal restored the addition made by the AO under section 68 of the Act, allowing the Revenue's appeal. The Tribunal emphasized the importance of examining the persons managing the investor entities to clarify the doubts raised by the AO and upheld the AO's inference that the assessee had routed its own money through the investor companies. Consequently, the appeal of the Revenue was allowed, and the addition of Rs. 4,86,45,500/- was restored.