2024 (11) TMI 227 - AT - Income Tax

Assessee wins appeal against Section 68 addition as share applicants' identity and creditworthiness proven through documents

Shankar Traders & Distributors Pvt. Ltd. Versus Income Tax Officer, Ward-5 (1) West Bengal

ITAT Kolkata allowed the assessee's appeal against addition under section 68 regarding share capital from 13 applicants. The tribunal held that the ... Addition made u/s 68 - share capital and share application money received from 13 share applicants - No evidences to prove the identity and creditworthiness of the share applicants and genuineness of the transactions - HELD THAT:- All documents speaks loud enough that identity and creditworthiness of alleged share applicants is established beyond doubt. Genuineness of the transactions is also proved because these companies have sufficient net worth to make the investment and they have applied in a NBFC company for better returns. Once, the assessee has discharged his primary onus, the burden of proof shifts on to Revenue authority and observations of AO that they are not satisfied with these details will not serve the purpose. At some part of the assessment order the AO has even observed that the assessee had filed submissions and some voluminous paper work which was of no use other than to increase the volume of the assessment report of the assessee company. We fail to find any justification in such observation of AO. Rather than mentioning the documents as voluminous paper work, he/ she should have move ahead to examine the correctness of those documents and should have discussed the same in the assessment order. General observation that the AO is not satisfied with the documents filed by the assessee cannot meet the requirement of law. We on perusal audited the balance sheet of the alleged share applicant companies notice that they have sufficient net worth in the form of share capital and accumulated reserve and surplus to explain the source of investment made in the assessee company. Even the provisions which entitles the revenue authorities to examine the case where a company not being a company in which public are substantially interested receive from any person in any consideration for issue of shares that exceeds the face value of such share, the aggregate consideration received for such shares as exceeds the fair market value of the share to be treated as income of other sources u/s 56(2)(VIIB) of the Act has been inserted by the Finance Act, 2012, with effect from 1st April, 2013 and is therefore not applicable for the year under consideration. We are thus of the considered view that the assessee has successfully explained the nature and source of the alleged share application money by way of proving the identity and creditworthiness of share applicants and genuineness of the transactions. We find that the assessee has successfully discharged the burden of proof primarily casted upon it to explain the identity and creditworthiness of all the alleged thirteens share applicants / shareholder and genuineness of the share transactions and correctness of such details has not been disputed by the Revenue Authorities except making general observations. Therefore, we are inclined to hold that no addition u/s 68 of the Act, is called for. Assessee appeal allowed. Issues Involved:1. Applicability of Section 68 of the Income-tax Act, 1961 regarding unexplained cash credits.2. Assessment of the genuineness, identity, and creditworthiness of share applicants.3. Evaluation of the burden of proof on the assessee and the Revenue.Issue-wise Detailed Analysis:1. Applicability of Section 68 of the Income-tax Act, 1961:The primary issue was whether the share capital and premium received by the assessee company could be treated as unexplained cash credits under Section 68 of the Income-tax Act, 1961. The Assessing Officer (AO) had added Rs. 2,30,00,000/- to the income of the assessee on account of unexplained cash credits, asserting that the assessee failed to satisfactorily explain the nature and source of the share capital and premium received. The AO concluded that the financial statements of the assessee did not justify the receipt of such substantial share premium.The Tribunal examined the provisions of Section 68, which mandates that if any sum is found credited in the books of an assessee, the assessee must provide a satisfactory explanation regarding the nature and source of such sum. The Tribunal referred to the Supreme Court's principles, which state that the assessee is obligated to prove the genuineness of the transaction, the identity of the creditors, and the creditworthiness of the investors. The AO is required to investigate these aspects and ascertain the genuineness of the transaction. The Tribunal noted that the AO had not conducted an independent inquiry to verify the genuineness of the transactions.2. Assessment of Genuineness, Identity, and Creditworthiness:The assessee provided detailed documents to establish the identity, creditworthiness, and genuineness of the share applicants. These included replies to notices under Section 133(6), income tax acknowledgments, audited financial statements, share applications, allotment advice, and bank statements. The Tribunal observed that the share applicants were private limited companies registered with the Ministry of Corporate Affairs and regularly assessed to tax. The companies had sufficient net worth to make the investments, and the transactions were conducted through banking channels. The Tribunal found that the assessee had discharged its initial burden of proof by providing these documents.The Tribunal emphasized that once the assessee furnishes evidence to prove the identity and creditworthiness of the share subscribers and the genuineness of the transaction, the burden shifts to the Revenue to examine the evidence and conduct further inquiries if necessary. The Tribunal noted that the AO had not pointed out any discrepancies or insufficiencies in the evidence provided by the assessee.3. Evaluation of the Burden of Proof:The Tribunal discussed the shifting of the burden of proof between the assessee and the Revenue. Initially, the burden is on the assessee to explain the credits in its books. Once the assessee provides a satisfactory explanation with supporting documents, the burden shifts to the Revenue to disprove the assessee's claim. The Tribunal found that the AO's general dissatisfaction with the documents filed by the assessee did not meet the legal requirement for invoking Section 68. The Tribunal also noted that the provisions of Section 56(2)(VIIB), relating to the treatment of share premium as income, were not applicable for the assessment year in question.The Tribunal referred to several judicial precedents, including decisions from the Supreme Court and High Courts, which supported the assessee's position. It concluded that the assessee had successfully explained the nature and source of the share application money, proving the identity and creditworthiness of the share applicants and the genuineness of the transactions. Consequently, the Tribunal set aside the addition made under Section 68 and allowed the assessee's appeal.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the addition under Section 68 was not warranted. The assessee had adequately discharged its burden of proof, and the Revenue failed to provide sufficient grounds to dispute the evidence provided by the assessee. The Tribunal's decision emphasized the importance of the AO conducting a thorough and independent inquiry before making additions under Section 68.