2025 (6) TMI 570 - AT - Income Tax

Section 68 addition for bogus share capital set aside, matter restored to AO for verification of foreign remittances claim

ITEC Measures Pvt. Ltd. Versus The ITO, Ward - 3, Vapi

ITAT Surat set aside CIT(A)'s order regarding addition under Section 68 for bogus share capital and share premium. The assessee claimed foreign ... Addition u/s 68 - Bogus share capital and share premium - HELD THAT:- The address of Shri Tejas Mehta at the time of completion of assessment on 13.12.2017 was Dubai. However, the appellant has received share capital and share premium much earlier on 03.10.2013 and 18.12.2013. It is not clear whether Shri Tejas Mehta was a non-resident during the said period. We also find that this plea of foreign remittances has not been taken by the assessee before the AO during the assessment proceedings. Such a contention was raised for the first time before the CIT(A), which is also admitted by the ld. AR of the assessee. We find that the CIT(A) has not given reasons for acceptance of the additional evidence filed by the assessee. He has also not called for a remand report from the AO on the fresh evidence and new contention of the appellant. It is altogether a different matter that he has upheld the action of the AO in adding the impugned sum u/s 68 of the Act. Therefore, we deemed it proper to set aside the order of CIT(A) and restored the matter to the file of AO to verify the claim of the assessee. Appeal of the assessee is allowed for statistical purpose. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in the appeal are:Whether the addition of Rs. 25,70,224/- made under section 68 of the Income-tax Act, 1961, on account of share capital and share premium introduced by Shri Tejas Mehta, is justified in absence of proof regarding identity, creditworthiness, and genuineness of the transaction.Whether the assessee discharged the onus of proving the source and genuineness of the share capital introduced by Shri Tejas Mehta.Whether the proviso to section 68 of the Act, which provides relief in case of share application money, share capital, and share premium received from non-resident investors, is applicable in the facts of the case.Whether the assessee can be penalized for non-cooperation of Shri Tejas Mehta in responding to notices issued under section 133(6) of the Act.Whether the appellate authority erred in admitting additional evidence and fresh contentions not raised before the Assessing Officer (AO) during assessment proceedings.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification for addition under section 68 of the Act for share capital introduced by Shri Tejas MehtaRelevant legal framework and precedents: Section 68 of the Income-tax Act requires that where any sum is found credited in the books of an assessee as share capital, the assessee must prove the identity of the shareholder, the creditworthiness of the shareholder, and the genuineness of the transaction. Failure to do so entitles the revenue to make an addition to the income of the assessee. The proviso to section 68 provides certain relaxations in case of share application money, share capital, and share premium received from non-resident investors, subject to fulfillment of prescribed conditions.Court's interpretation and reasoning: The AO observed that the assessee failed to establish the identity, creditworthiness, and genuineness of the amount of Rs. 25,70,224/- introduced by Shri Tejas Mehta, as the assessee could not furnish bank statements, confirmations, or other relevant details during assessment proceedings. The AO also noted that Shri Tejas Mehta's current address was Dubai, but no cooperation was received from him in response to notices issued under section 133(6). Consequently, the AO made the addition under section 68. The CIT(A) upheld the AO's order on the ground that the assessee failed to discharge the primary onus despite multiple opportunities.Key evidence and findings: The assessee submitted PAN, Form DIN-1, and stated that Shri Tejas Mehta was a director during the relevant period and had sold shares subsequently. The assessee also submitted bank statements during appellate proceedings showing remittances through banking channels. However, these details were not submitted during the assessment proceedings. The AO's notices to Shri Tejas Mehta remained unanswered.Application of law to facts: The Tribunal noted that the addition under section 68 is justified if the assessee fails to prove identity, creditworthiness, and genuineness. Here, the assessee did not produce sufficient evidence before the AO. The Tribunal observed that the assessee raised the contention of foreign remittances and non-resident status of Shri Tejas Mehta for the first time before the CIT(A), which was not canvassed during assessment proceedings.Treatment of competing arguments: The assessee argued that the share capital was introduced by an NRI, and the proviso to section 68 exempts such receipts from addition if proper formalities are complied with, including RBI permissions and FIRC. The assessee contended that it should not be penalized for non-cooperation by Shri Tejas Mehta. The revenue countered that the basic requirements of section 68 regarding identity and creditworthiness were not met, and the plea of foreign remittances was not raised before the AO, thus not admissible.Conclusions: The Tribunal found that the plea of foreign remittance and non-resident status was a new contention not raised before the AO and that the CIT(A) did not properly deal with the additional evidence. Therefore, the matter was remanded to the AO for fresh verification and decision in accordance with law after considering all relevant details.Issue 2: Applicability of proviso to section 68 of the Act for non-resident investorsRelevant legal framework and precedents: The proviso to section 68 exempts share application money, share capital, and share premium received from non-resident investors from being treated as unexplained cash credit, subject to compliance with prescribed conditions such as RBI approval and submission of Foreign Inward Remittance Certificate (FIRC).Court's interpretation and reasoning: The Tribunal noted that the assessee claimed applicability of the proviso since Shri Tejas Mehta was an NRI residing in Dubai. However, it was unclear whether he was a non-resident at the time of remittance. The Tribunal also observed that the contention was not raised before the AO and was first taken before the CIT(A), who did not call for a remand or verification on this issue.Key evidence and findings: The assessee submitted copies of bank statements showing remittances through banking channels, RBI permissions, FIRC copies, and certificates from the company secretary during appellate proceedings but not before the AO.Application of law to facts: Since the proviso's applicability depends on the non-resident status of the investor at the time of remittance and compliance with FEMA and RBI regulations, the AO is best placed to verify these facts after calling for necessary details.Treatment of competing arguments: The revenue argued that since the assessee failed to prove identity and creditworthiness before the AO, the proviso cannot be invoked at the appellate stage without proper verification.Conclusions: The Tribunal refrained from expressing any opinion on the applicability of the proviso and remanded the matter to the AO for fresh adjudication after considering all relevant evidence and explanations.Issue 3: Admissibility of additional evidence and fresh contentions before appellate authoritiesRelevant legal framework and precedents: It is a settled principle that fresh evidence and new contentions should ordinarily be raised before the AO during assessment proceedings. Appellate authorities may admit additional evidence only under exceptional circumstances and after proper reasons are recorded, often requiring remand to the AO for verification.Court's interpretation and reasoning: The Tribunal observed that the assessee raised the plea of foreign remittances and non-resident status for the first time before the CIT(A), and the CIT(A) admitted the evidence without calling for a remand report or reasons for admission. Despite this, the CIT(A) upheld the addition under section 68.Key evidence and findings: The assessee submitted a voluminous paper book with banking and regulatory documents before the CIT(A), which were not submitted during assessment proceedings.Application of law to facts: The Tribunal held that the CIT(A) erred in admitting fresh evidence without remanding the matter to the AO for verification and without recording reasons. This procedural lapse warranted setting aside the appellate order and remanding the matter.Treatment of competing arguments: The assessee contended that the fresh evidence was necessary as Shri Tejas Mehta did not cooperate during assessment proceedings. The revenue contended that the issue was not canvassed before the AO and hence inadmissible.Conclusions: The Tribunal set aside the CIT(A) order and remanded the matter to the AO for fresh adjudication after considering the additional evidence and new contentions in accordance with law.3. SIGNIFICANT HOLDINGS'It is not clear whether Shri Tejas Mehta was a non-resident during the said period. We also find that this plea of foreign remittances has not been taken by the assessee before the AO during the assessment proceedings. Such a contention was raised for the first time before the CIT(A), which is also admitted by the ld. AR of the assessee.''We find that the CIT(A) has not given reasons for acceptance of the additional evidence filed by the assessee. He has also not called for a remand report from the AO on the fresh evidence and new contention of the appellant.''Therefore, we deemed it proper to set aside the order of CIT(A) and restored the matter to the file of AO to verify the claim of the assessee and decide the matter in accordance with law. We make it very clear that we are not expressing any opinion as to whether the 2nd proviso to section 68 of the Act is applicable in the present case. The AO shall be at liberty to decide the issue in accordance with law after calling for necessary details and explanation from the assessee.'Core principles established include:The primary onus under section 68 lies on the assessee to prove identity, creditworthiness, and genuineness of share capital transactions.Fresh contentions and evidence not raised before the AO require proper admission procedures, including remand for verification.The proviso to section 68 providing relief to non-resident investors is subject to fulfillment of prescribed conditions and factual verification.Non-cooperation of a third party (shareholder) does not absolve the assessee from its onus but may be a relevant factor in considering the evidence.Final determinations:The addition under section 68 was upheld by the AO and CIT(A) due to failure of the assessee to discharge its onus during assessment proceedings.The Tribunal set aside the appellate order and remanded the matter to the AO for fresh adjudication after considering additional evidence and verifying the applicability of the proviso to section 68.The Tribunal did not express any opinion on the merits of the proviso's applicability but emphasized adherence to procedural fairness and proper evidence evaluation.