2019 (7) TMI 2075 - AT - Income Tax

Share application and premium money treated as 'unexplained' u/s68 over alleged accommodation entries; addition deleted, appeal allowed

The dominant issue was whether share application/share premium receipts could be added as unexplained cash credits under s.68 on the allegation that the ... Addition made towards share application money u/s 68 - bogus LTCG - Onus to prove - assessee company is engaged in the business of trading in suiting and shirtings - DR argued that the assessee had only received bogus share capital/share application and share premium monies from aforesaid entities from parties who have been found to be mere accommodation entry providers - HELD THAT:- The share subscribing companies are duly assessed to income tax. It is not in dispute that the share subscribing companies are in existence. It is not in dispute that the share subscribing companies are duly assessed to income tax and their income tax particulars together with the copies of respective income tax returns with their balance sheets are already on record. Hence it could be safely concluded that they are genuine shareholders and not bogus and fictitious. Accordingly, the ratio laid down in the case of M/s Earthmetal Electricals P Ltd [2010 (7) TMI 1137 - SC ORDER] would be squarely applicable to the facts of the instant case. We would like to add that receipt of share capital for a company is not a prohibited transaction, as that is one of the main source of raising funds for a company to run its intended activities. Once all the relevant details of the investor companies were filed by the assessee before the ld AO, it is incumbent on the part of the ld AO to trigger the further verification on the investor companies by either issuing notice u/s 133(6) or summons u/s 131 of the Act to examine the veracity of the documents furnished before him. In the instant case, admittedly no such verification was carried out by the ld AO. The only premise on which addition was made was by placing reliance on the statement recorded from Shri Praveen Kumar Jain during the course of his search action. In these facts and circumstances, there is absolutely no reason to draw any adverse inference on the impugned transactions and the documents submitted by the assessee. We find that the Hon'ble Apex Court recently in the case of Vaishnodevi Refoils & Solvex[2018 (7) TMI 651 - SC ORDER] had dismissed the SLP of the Revenue. The brief facts were that the addition u/s 68 of the Act was made by the Assessing Officer in respect of capital contributed by the partner of the firm. The Hon'ble High Court noted that when the concerned partner had confirmed before the Assessing Officer about his fact of making capital contribution in the firm and that the said investment is also reflected in his individual books of accounts, then no addition could be made u/s 68 of the Act. CIT-A had rightly deleted the addition made u/s 68 in the instant case on which we do not find any infirmity in his order. Assessee appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the receipt of share application money/share capital and share premium could be treated as unexplained cash credit under section 68 when the assessee produced documentary evidence establishing the identity of share applicants, their creditworthiness, and the genuineness of banking transactions. 2. Whether an addition under section 68 could be sustained primarily on the basis of a third-party statement alleging accommodation entries, when the statement and related adverse material were not furnished to the assessee and no opportunity of cross-examination was provided. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainability of section 68 addition on share application money/share capital/share premium Legal framework (as discussed by the Court): The Court proceeded on the requirement under section 68 that the assessee must satisfactorily explain the nature and source of the credit by proving (i) identity of the share applicants, (ii) their creditworthiness, and (iii) genuineness of the transactions through banking channels. Interpretation and reasoning: The Court found that the assessee furnished comprehensive supporting documentation for each subscriber, including share application forms, confirmations, board resolutions, PAN, financial statements reflecting the investment, bank statements evidencing payments by account payee instruments, incorporation/constitutional documents, income-tax returns, ROC 'active' status, affidavits of directors, and statutory filings evidencing allotment. The Court also noted that the subscribing companies had adequate capital/reserves (and reflected the investments in their balance sheets), and that the payments were made directly through banking channels from their bank accounts. The Court emphasized that, after receipt of these materials, the assessing authority carried out no verification with the share applicants (no meaningful enquiries/summons/notices based on the documents) and did not bring any cogent adverse material to rebut the assessee's evidence. Conclusions: The Court held that the assessee had discharged the onus under section 68 by proving identity, creditworthiness, and genuineness, and that the addition could not be sustained in the absence of contrary evidence or enquiry by the assessing authority. The deletion of the addition was upheld. Issue 2: Reliance on third-party statement and denial of natural justice (non-supply of material and cross-examination) Legal framework (as discussed by the Court): The Court treated adherence to principles of natural justice as foundational where adverse third-party material is used. If material relied upon is not provided to the assessee for rebuttal and the assessee is denied cross-examination of the deponent whose statement is used against it, the evidentiary value of such statement is undermined. Interpretation and reasoning: The Court recorded that the assessee requested the statement that formed the principal basis of the addition, but it was not furnished. No opportunity to cross-examine the deponent was provided. The Court concluded that a statement taken 'behind the back' of the assessee and not put to the assessee for rebuttal could not be relied upon. It further noted that the assessing authority relied on a general allegation of accommodation entries without producing appellant-specific evidence linking the share applicants' payments to unaccounted cash of the assessee, and without establishing commission payments or cash trail. Conclusions: The Court held that the assessment, to the extent it treated the share receipts as unexplained, was vitiated by failure to provide the relied-upon material and by denial of cross-examination, and therefore the addition could not stand on such basis. The appellate deletion was affirmed.