Assessee fails to justify Rs 190 share premium for dormant company under Section 68

The ITAT Kolkata upheld the AO's addition under Section 68 for unverified share premium, reversing the CIT(A)'s deletion. The tribunal found that the assessee company had no business activity during the relevant year, making the Rs 190 per share premium from investors commercially unjustifiable. The tribunal held that no prudent investor would pay such premium for a dormant company with poor business credentials and no future prospects. Following the BST Infratech precedent, the tribunal concluded the assessee failed to prove transaction genuineness and discharge the burden under Section 68, allowing the revenue's appeal.

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Issues Involved:
1. Deletion of addition of Rs. 4,63,00,000/- on account of allegedly unverified share premium amount added as unexplained cash credit.
2. Non-appearance of the assessee despite multiple notices.
3. Compliance with the provisions of Section 68 of the Income Tax Act, 1961.
4. Applicability of judicial pronouncements and amendments to Section 68.

Detailed Analysis:

1. Deletion of Addition of Rs. 4,63,00,000/- on Account of Allegedly Unverified Share Premium Amount Added as Unexplained Cash Credit:

The primary issue in this case revolves around the deletion of an addition of Rs. 4,63,00,000/- by the Commissioner of Income Tax (Appeals) [CIT(A)], which was originally added by the Assessing Officer (AO) as unexplained cash credit under Section 68 of the Income Tax Act, 1961. The AO had issued a detailed questionnaire to the assessee to elicit responses regarding the share capital and directed the directors to make a personal appearance to explain the genuineness of the transactions. The AO recorded that the assessee raised fresh share capital by issuing 2,31,500 shares of Rs. 10/- face value with a premium of Rs. 190/-, totaling Rs. 4,63,00,000/-. The AO noted that the assessee company had no business activities during the year under consideration, and the investment did not make prudent business sense. Consequently, the AO added the amount as unexplained cash credit.

2. Non-Appearance of the Assessee Despite Multiple Notices:

The case had an unusual history of hearings, with multiple attempts made to serve notices to the assessee, all of which failed. Notices sent through registered post were returned with the remark 'left', and attempts to serve notices through the Income Tax Department were also unsuccessful. Despite these efforts, the assessee did not appear, leading to the case being proceeded ex parte.

3. Compliance with the Provisions of Section 68 of the Income Tax Act, 1961:

The CIT(A) deleted the addition made by the AO, stating that the assessee had fully explained the nature and source of the share application received and discharged its onus to prove the identity, creditworthiness, and genuineness of the share applicants. However, the Revenue challenged this action, arguing that the financial profiles of the investor companies were not considered. The Revenue contended that the assessee failed to establish the creditworthiness of the investor companies and relied on several judicial pronouncements to support their point.

4. Applicability of Judicial Pronouncements and Amendments to Section 68:

The judgment extensively discussed various judicial pronouncements relevant to the case:

- PCIT vs. NRA Iron & Steel (P.) Ltd.: The Supreme Court held that the AO was justified in making additions under Section 68 when the assessee failed to establish the creditworthiness of the investor companies, even if confirmations from investor companies were filed.
- Neelkantha Commosales (P.) Ltd. vs. ITO: The Calcutta High Court held that an Income Tax Officer could make an enquiry about the true nature and source of any sum credited in the books of the assessee, even if credited as share application money.
- Bal Gopal Merchants (P.) Ltd. vs. PCIT: The Calcutta High Court upheld the addition made under Section 68 when the assessee failed to comply with summons and had no noticeable business activity.
- PCIT vs. BST Infratech Ltd.: The Calcutta High Court held that transactions through banking channels or the fact that investor companies were income tax assessees were insufficient to discharge the onus under Section 68. The court emphasized the need for the assessee to prove the source of money in the hands of the shareholders.

The judgment also referred to amendments to Section 68 by the Finance Act, 2012, which clarified that the onus of proving the creditworthiness of the investors and the genuineness of the transaction lies with the assessee, even for closely held companies. The Tribunal relied on earlier judgments to conclude that the amendment was clarificatory and retrospective in nature.

Conclusion:

In light of the above discussion, the Tribunal held that the assessee failed to discharge the burden of proof under Section 68 of the Income Tax Act. The appeal filed by the Revenue was allowed, and the addition of Rs. 4,63,00,000/- was sustained. The judgment emphasized the importance of proving the creditworthiness of investors and the genuineness of transactions, especially in cases involving closely held companies.

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