2023 (1) TMI 487 - HC - Income Tax

Dismissed appeal due to condoned delay. Tribunal upheld validity of addition under Income Tax Act

Pr. Commissioner of Income Tax Versus M/s. Enrich Agro Food Products Pvt. Ltd.

Pr. Commissioner of Income Tax Versus M/s. Enrich Agro Food Products Pvt. Ltd. - [2023] 455 ITR 664 (Del) 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in making additions under Section 68 of the Income Tax Act, 1961 in respect of unexplained credits arising from infusion of share capital and share premium. 2. Whether the 'triple test' - identity, creditworthiness and genuineness of the investor/transaction - was satisfied so as to negate the applicability of Section 68 additions. 3. Whether valuation of shares (price including share premium) offered was established sufficiently to rebut suspicion regarding share premium and to preclude any addition under Section 68. 4. Whether concurrent findings of fact recorded by the Commissioner (Appeals) and the Tribunal can be interfered with by the Court on the material on record. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of addition under Section 68 for unexplained credits (share capital and share premium) Legal framework: Section 68 permits taxing unexplained credits where the assessee fails to satisfactorily explain identity of the creditor, genuineness of the transaction and the creditworthiness of the source. Precedent treatment: The courts have developed the 'triple test' (identity, creditworthiness and genuineness) as the determinative framework for deciding Section 68 additions; concurrent findings on these aspects attract deference. Interpretation and reasoning: The Tribunal and CIT(A) found that the assessee received share capital and premium from a single identified investor and that documentary evidence (Form PAS-3 filed before ROC, investor confirmation, investor bank statements showing payment, share application form, PAN copy, ITR acknowledgement and statement of affairs of the investor) had been placed on record. The investor's source of funds was traced to salary and unsecured loans from eight identifiable parties; for those lenders the assessee produced MCA extracts, confirmations, bank statements, PANs and audited financial statements demonstrating capacity to lend. The AO's adverse material (investigation reports and statements referring to other companies) was held irrelevant to the instant transaction and did not impair the evidentiary matrix presented. Ratio vs. Obiter: The holding that Section 68 additions could not be sustained on the facts (given identity, creditworthiness and genuineness established) is ratio decidendi. Observations that the AO's references to unrelated statements were infructuous are ancillary but support the primary ratio. Conclusion: The Tribunal's and CIT(A)'s concurrent findings that the triple test was satisfied were upheld; accordingly the addition under Section 68 was not justified on the available material. Issue 2 - Satisfaction of the 'triple test' (identity, creditworthiness, genuineness) Legal framework: For additions under Section 68, the assessee must establish identity of the investor, creditworthiness of the investor and genuineness of the transaction; proof of 'source of source' strengthens the case for genuineness and creditworthiness. Precedent treatment: Authorities permit reliance on documentary evidence, bank records and source tracing (including source of the investor's funds) to meet the triple test; where such proof is credible and uncontroverted the AO cannot make additions. Interpretation and reasoning: The Court accepted the Tribunal's detailed factual findings that a single identifiable individual subscribed to the shares, produced primary documents proving identity and payment, and that the investor's funds were sourced from salary and unsecured loans from eight named entities. The assessing officer did not point to adverse material undermining these documents; there was no record that funds cycled back from the assessee to the lenders. The Tribunal found lender capacity established by audited financial statements and PAN/ bank confirmations. The AO's contention about the investor not being produced was not supported by any summons or request to produce the investor in the assessment order. Ratio vs. Obiter: The determination that the triple test is satisfied by the combination of identity documents, bank entries and documentary proof of the source of source is ratio. Remarks on the insufficiency of AO's contrary observations (e.g., on investor companies' turnovers inapplicable where the investor is an individual) are explanatory obiter supporting the ratio. Conclusion: Identity, creditworthiness and genuineness were proved on the record; the addition under Section 68 therefore could not stand. Issue 3 - Sufficiency of valuation evidence for share premium Legal framework: Where share premium is in question, the assessee must produce credible valuation evidence; absence of contrary material from the revenue weakens the case for making an addition on valuation grounds. Precedent treatment: Valuation reports certified by competent professionals and corroborative audited accounts are accepted as relevant evidence unless rebutted by cogent contrary material. Interpretation and reasoning: The assessee produced a Chartered Accountant's valuation report indicating share value at Rs.185 (inclusive of premium) as per audited accounts. The record contained no material contradicting the valuation report. Given the absence of contrary evidence, the valuation was treated as established. Ratio vs. Obiter: The conclusion that valuation stood established in the absence of contrary material is ratio as applied to the present facts; broader commentary on valuation standards is obiter. Conclusion: Valuation of shares, including share premium, was adequately established and did not warrant a Section 68 addition. Issue 4 - Interference with concurrent findings of fact by appellate Court Legal framework: Concurrent findings of fact by the first appellate authority and the Tribunal are ordinarily binding and not to be disturbed by a court unless perverse or no evidence supports them. Precedent treatment: Courts defer to concurrent factual findings where the record contains credible documentary and testimonial material supporting those findings. Interpretation and reasoning: The Court found that the Tribunal and CIT(A) had furnished detailed reasons and relied on documentary evidence establishing identity, creditworthiness, genuineness and valuation. The AO's contrary observations were either inapplicable or unsupported by direct adverse evidence. There was thus adequate material to sustain the concurrent findings. Ratio vs. Obiter: The principle of deference to concurrent findings on questions of fact is applied as ratio to dismiss interference; comments on the limits of appellate interference are reiterative obiter grounded in the facts. Conclusion: No substantial question of law arises from the concurrent findings; the appeal was dismissed and the Section 68 addition sustainedly rejected.