2020 (12) TMI 344 - AT - Income Tax

Tribunal overturns tax addition, assessing identity, creditworthiness, genuineness of transaction

The Tribunal directed the AO to delete the addition of Rs. 1,67,50,000 made under Section 68 of the Income Tax Act as the assessee had satisfactorily ... Unexplained receipt of money u/s 68 - as per AO creditworthiness and genuineness of the transaction cannot be said to have been proved - information received by AO under exchange of information provisions - assessee has got an investment from Kstart LLC, Mauritius as a contribution towards issue of 20,000 compulsorily convertible preference shares - HELD THAT:- Evidences obtained by the learned assessing officer in terms of article 26 of the Double Taxation Avoidance Convention between India and Mauritius, the annual financial statement of the investor, the background of the investor as mentioned in the financial statements, the amount of investments made by the investor in other companies across the globe, the amount of share capital introduced by the holding company of the investor, the financial operations of the investor deciphered from the financial statements of the investor, Financial and Legal Due diligence by investors, we do not find that there is an iota of doubt about the creditworthiness and genuineness of the about transaction of allotment of 20,000 compulsorily convertible redeemable shares resulting into allotment of shares worth ₹ 1, 67,50,000 from K start LLC of Mauritius. Various judicial precedents relied upon by the learned CIT – A and the learned assessing officer supporting the above addition made by the learned assessing office are not applicable to the facts of this case as in this case assessee has proved identity, creditworthiness of the investor as well as the genuineness of the whole transaction - We delete the addition made u/s 68 with respect to the about transaction - Decided in favour of assessee. Issues Involved:1. Addition under Section 68 of the Income Tax Act of Rs. 1,67,50,000 received by the assessee as share capital and share premium from Kstart LLC, Mauritius.2. Justification of the CIT (A) in sustaining the addition made by the AO.3. Non-adjudication by the CIT (A) on the ground that the AO's order was not in accordance with the directions given by the Addl. CIT under Section 144A of the Act.Detailed Analysis:1. Addition under Section 68 of the Income Tax Act:The primary issue was whether the sum of Rs. 1,67,50,000 received by the assessee as share capital and share premium from Kstart LLC, Mauritius, could be considered as unexplained credit under Section 68 of the Income Tax Act. The assessee provided extensive documentation to establish the identity, creditworthiness, and genuineness of the investor, including:- Certificate of incorporation of Kstart LLC.- Permanent account number.- Financial statements of Kstart LLC.- Bank statements reflecting the transfer of funds.- Foreign inward remittance certificate.- KYC form issued by the bank.- Form FC GPR filed with the Reserve Bank of India.- Tax residency certificate issued by Mauritius authorities.- Valuation report of the shares.The AO, however, was not satisfied, citing incomplete bank statements, lack of income tax returns, and the financial position of Kstart LLC as reasons for doubting the genuineness and creditworthiness of the transaction. Despite the information obtained from Mauritius authorities under the Exchange of Information provisions, which confirmed the investment details, the AO made an addition under Section 68.2. Justification of the CIT (A) in Sustaining the Addition:The CIT (A) upheld the AO's decision, emphasizing the pattern of fund transfer, the lack of substantial own funds with Kstart LLC, and the absence of substantial business operations as indicators of the transaction's lack of genuineness. The CIT (A) relied on various judicial precedents to support the addition, including cases like Nakoda Fashions Ltd, CIT vs. Novadaya Castles Pvt Ltd, and CIT vs. Nipun Builders and Developers Pvt Ltd.3. Non-adjudication by the CIT (A) on Directions under Section 144A:The assessee argued that the AO's order was not in accordance with the directions given by the Addl. CIT under Section 144A, which directed the AO to take a fair and judicious view. However, the CIT (A) did not adjudicate on this ground, focusing instead on the merits of the addition under Section 68.Tribunal's Findings:The Tribunal considered the extensive documentation provided by the assessee and the information obtained by the AO under the Exchange of Information provisions. It noted that Kstart LLC was a seed fund created by Kallari Capital, a leading venture capital firm with substantial assets under management. The Tribunal found no reason to doubt the creditworthiness and genuineness of the transaction, given the detailed evidence provided, including the financial and legal due diligence reports.The Tribunal also clarified that Section 68 applies equally to sums credited from resident and non-resident shareholders, and compliance with RBI guidelines does not automatically prove or disprove the nature and source of credit under the Income Tax Act. However, in this case, the assessee had discharged its onus of proving the identity, creditworthiness, and genuineness of the transaction.Conclusion:The Tribunal directed the AO to delete the addition of Rs. 1,67,50,000 made under Section 68, as the assessee had satisfactorily established the identity, creditworthiness, and genuineness of the transaction. Consequently, the other grounds raised by the assessee were rendered moot or general in nature and were dismissed. The appeal was partly allowed.Order Pronounced:The order was pronounced in the open court on 07/12/2020.