2025 (9) TMI 1050 - AT - Income Tax

s.68 addition for alleged bogus share application money deleted; s.14A disallowance remitted for fresh AO verification

Jagdamba Commotrade LLP (Erstwhile Jagdamba Commotrade Pvt. Ltd.) Versus ITO, Ward-32 (1), Kolkata (Erstwhile ITO-5 (4), Kolkata)

ITAT allowed the appeal. It held the s.68 addition for alleged bogus share application money unsustainable because the remand report and bank statements ... Addition u/s 68 - bogus share application money - as per AO assessee could not furnish any satisfactory explanation with regard to the transaction involving share allotment at such share premium either before the AO during the assessment proceeding or during the remand proceedings - HELD THAT:- There is no doubt the AO in sending the remand report has clearly stated that the amount received by the assessee company is not in FY 2011-12. Hence the provision of section 68 in AY 2012-13 does not arise. The remand report further reveals that bank statement reveals that the transaction took place in earlier years i.e. prior to financial year i.e. 2011-12 - addition u/s 68 confirmed by the Ld. CIT(A) is erroneous. Hence the same is hereby directed to be deleted. Disallowance made u/s 14A - assessee submits that the assessee had no exempt income during the FY 2011-12 relevant to AY 2012-13 - Keeping in view, the submission of the ld. Counsel for the assessee, we are inclined to send this issue back before the AO to verify the same whether the assessee had earned any exempt income during FY 2011-12 relevant to AY 2012-13 and decide the case afresh. Appeal filed by the assessee is allowed, A/O is directed to decide the issue of disallowance u/s 14A after hearing and verifying the same as above. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether addition under section 68 can be sustained for assessment year where share capital and premium credited in books pertain to earlier financial years (i.e., whether share application money received in prior years but allotted in the relevant year can be taxed under section 68 in the year of allotment). 1.2 Whether the assessee satisfactorily proved identity, genuineness and creditworthiness of share subscribers so as to negate application of section 68 for the impugned sum. 1.3 Whether disallowance under section 14A is sustainable where it is disputed that any exempt income was earned in the relevant financial year, and what is the appropriate procedural course when the fact of exempt income is in dispute. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 68 where funds were received in earlier years but share allotment occurred in the impugned year Legal framework: Section 68 applies where 'any sum is found credited in the books of an assessee maintained for any previous year' and the assessee fails to offer a satisfactory explanation as to the nature and source of such credit; the provision is therefore tied to the previous year in which the sum is shown credited in the books. Precedent treatment: The Tribunal relied on the reasoning of a higher court decision which held that conversion of amounts already appearing as liabilities/loans in books from prior years into share application money in a later year does not amount to fresh credit in the relevant previous year and hence section 68 is not attracted; that decision was followed insofar as its ratio is factually analogous. Interpretation and reasoning: The Tribunal examined the remand report and third-party verifications under section 133(6), including ledger confirmations, bank statements and share application/allotment documents from subscribing entities. The AO's remand report concluded on verification that the amounts were received in earlier financial years (prior to FY 2011-12) and not in the financial year relevant to the assessment year where the addition under section 68 was made. Applying the statutory language of section 68, the Court reasoned that where the sums were credited in earlier previous years (and reflected as 'share application money pending allotment' and similar heads in audited financial statements), there was no fresh sum found credited in the previous year relevant to the assessment year under challenge; hence section 68 could not be invoked in that year. Ratio vs. Obiter: Ratio - where sums can be shown by contemporaneous books, bank statements and independent third-party confirmations to have been received in prior previous years, section 68 cannot be applied in a later year merely because allotment occurred later. Obiter - ancillary observations on the sufficiency of the remand procedure and the conduct of parties in the original assessment are not essential to the central holding. Conclusion: The addition under section 68 in the impugned assessment year was erroneous and directed to be deleted because the evidence established that the funds were received in earlier years and not credited in the books for the previous year relevant to the challenged assessment year. Issue 2 - Sufficiency of proof as to identity, genuineness and creditworthiness of share subscribers Legal framework: Section 68 requires the assessee to satisfactorily explain the nature and source of credited sums; proof of identity, genuineness and creditworthiness of the source of funds is a recognized method to discharge the burden. Precedent treatment: The Tribunal applied established practice that ledger confirmations, bank statements and third-party replies to statutory notices (e.g., section 133(6) verifications) are relevant material to establish the nature and timing of receipts and the identity/creditworthiness of subscribers; the earlier appellate decision relied upon was followed on the point that prior receipt in books negates fresh credit. Interpretation and reasoning: The remand report documented that notices under section 133(6) were issued and responses produced ledger confirmations, bank statements and share application/allotment advices corroborating payments in earlier years. The Tribunal treated these corroborative documents as adequate to establish the factual position that payments were made prior to the relevant financial year and to identify the subscribing entities. Because the AO, on remand, recorded that the bank statements corroborated earlier receipts and that replies to section 133(6) were on record, the Tribunal concluded that the requisites for invoking section 68 in the impugned year were absent. Ratio vs. Obiter: Ratio - third-party confirmations and bank records showing timing of receipts are decisive in establishing whether sums were credited in the previous year and in proving identity/genuineness to exclude section 68: such evidence may negate the application of section 68. Obiter - remarks about the AO's initial refusal to examine directors in the original assessment are incidental. Conclusion: The evidence gathered (ledger confirmations, bank statements, section 133(6) replies and financial statement disclosures) sufficed to rebut the invocation of section 68 for the impugned assessment year; therefore the addition was deleted. Issue 3 - Disallowance under section 14A where existence of exempt income in the relevant year is disputed; appropriate procedural disposition Legal framework: Section 14A disallows expenditure incurred in relation to exempt income; entitlement to disallowance depends on whether exempt income was earned in the relevant previous year. The AO must determine whether exempt income exists and then quantify disallowance under the statutory mechanistic or judicially evolved tests. Precedent treatment: The Tribunal applied the general principle that factual disputes regarding existence of exempt income and the quantum of related disallowance should be examined by the Assessing Officer with opportunity to the assessee to be heard; when primary facts are unclear on the record, remand to the AO is appropriate. Interpretation and reasoning: The assessee denied earning any exempt income in the financial year in question. Given that section 14A operates only if exempt income exists, and considering that resolution of that factual question was not completed on the record before the Tribunal, the Tribunal opted not to decide the merits of section 14A on the appellate record. Instead, the Tribunal directed the AO to verify whether any exempt income was earned during the relevant year and to adjudicate the section 14A disallowance after affording the assessee an opportunity of being heard. Ratio vs. Obiter: Ratio - where the presence of exempt income is contentious and not resolved on available records, the correct course is to remit the matter to the AO for fact-finding and fresh adjudication with hearing. Obiter - no determination was made on the legality of any particular method for computing the disallowance. Conclusion: The issue of disallowance under section 14A was remitted to the AO for fresh adjudication after verifying whether exempt income was earned in the relevant financial year and after providing the assessee an opportunity to be heard; no final conclusion on section 14A was reached by the Tribunal on the appellate record. Cross-references and final disposition Where issues of timing and nature of credited sums are resolved by documentary evidence and independent third-party verifications indicating earlier receipt, section 68 cannot be invoked in a later assessment year merely because share allotment occurred later; the Tribunal deleted the section 68 addition but remitted the section 14A matter for fact-finding and fresh decision by the AO.