2025 (9) TMI 1583 - AT - Income Tax

Share-capital contributions held genuine; addition under Section 68 deleted including 2% commission; Section 43(5) intraday loss set-off remitted

ITAT Delhi (AT) held that the share-capital contributions were genuine and deleted the AO's addition under section 68, including the 2% commission, noting ... Addition u/s 68 - accommodation entries receipt - bogus LTCG - HELD THAT:- Assessee has submitted all the relevant documents and confirmation in support of the issue of share capital to three shareholders. The time given to the assessee to produce the Directors, the assessee does not have power to direct those directors to present before the AO. Assessee has produced all relevant information including income-tax return of shareholders, if required the AO could have initiated proceedings to make sure that those directors were present before him. The time given to the assessee to produce them was also too short. It is also fact on record that these companies are in existence and they are filing return regularly. Declaring negligible income in their return of income, we observe that the Courts have held that any capacity of the investors cannot be the basis of determining the creditworthiness. It is the availability of funds with them which determines the creditworthiness of the companies. The balance sheet submitted by the assessee shows that they have enough reserves and surplus of funds available in their business. Transferring the funds for making investment and maintaining very low bank balance of the investors have no relevance to determine the genuineness of the transaction. AO observed that the assessee has not declared any dividend. It cannot be a criteria to determine the genuineness of the transaction. It is the independent decision of the investors to make the investment in the respective companies. The declaration of the dividend is purely depends upon future profit of the company. After considering the details and various documents produced before the AO and submitted in the form of paper book, it clearly shows that the share capital issued by the assessee is genuine and even there is no premium involved in the issue of shares, therefore, genuineness cannot be doubted for issue of shares. AO treated the issue of shares as accommodation entry, he made 2% as commission which also deserves to be deleted. Accordingly, Ground raised by the assessee are allowed. Loss in intraday transactions on the stock exchange not being set-off against intraday profits in the computation of income of the AO - as submitted that AO has failed to consider the amendment made in section 43(5) of the Act and submitted that there is no discrepancy between derivatives transactions which suffer CTT/STT or not - HELD THAT:- We observe that the AO has not appreciated the transactions on the basis of amended provisions of section 43(5), therefore, for the sake of complete justice, we are inclined to remit this issue to the file of AO to verify the claim of the assessee considering the amended provisions of section 43(5) of the Act and pass order in accordance with law. Accordingly, Ground Nos.C & D raised by the assessee are allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether the additions made u/s 68 in respect of fresh share capital (Rs. 8,00,00,000) can be sustained where subscriber companies filed income-tax returns, paid by banking channels, furnished confirmations/affidavits, and the assessee could not produce subscribing directors within a short notice period. 2. Whether an addition of commission (Rs. 16,00,000) as unexplained expenditure, purportedly payable to procure accommodation share capital, can be sustained without evidence of payment or agency arrangement. 3. Whether losses from intraday equity transactions (treated by the AO as speculative under sec. 43(5)) are excludeable from set-off against profits from commodity/derivative trading (some of which are subject to CTT and some exempt) - i.e., proper interpretation and application of amended sec. 43(5) and its provisos/explanations. 4. Whether the issue of penalty proceedings u/s 271(1)(c) is adjudicable when criminal/consequential in nature to additions/denials sustained or reversed. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of addition u/s 68 on account of share capital subscription (identity, creditworthiness and genuineness) Legal framework: Section 68 imputes income where the identity, creditworthiness or genuineness of share capital/subscription is not satisfactorily explained by the assessee. Revenue may verify identity/creditworthiness by enquiries including issuance of notices under s.133(6) and inspection. Precedent Treatment: The authorities below invoked judicial precedents to support adverse findings; the assessee relied on multiple Supreme Court and High Court decisions (including decisions post-dating older precedents) to assert that statutory requirements were satisfied by banked payments, returns filed and documentary confirmations. The Tribunal referenced the line of Supreme Court rulings cited by the assessee as relevant to the controversy over induction of share capital. Interpretation and reasoning: The Tribunal examined the material on record - income-tax returns and audited accounts of subscriber companies, bank transfers by RTGS, confirmations and affidavits from subscriber directors and company existence evidence (continuing filings). The AO's adverse inference rested on (a) non-production of subscribing directors within two days; (b) low bank balances and immediate inward credit-transfer-out pattern; (c) lack of dividend history; and (d) inability of departmental inspector to trace companies at addresses. The Tribunal reasoned: (i) filing of returns and audited accounts and payments through banking channels constitute direct and prima facie evidence of identity and genuineness; (ii) inability to produce directors on short notice does not negate documentary evidence and the assessee cannot compel third-party attendance in the short timeframe; (iii) low bank balances and immediate internal cash management are commercially plausible and do not prove lack of creditworthiness; (iv) absence of dividend is not indicative of fraud where the investee has losses; and (v) where no contrary material was produced by Revenue to rebut documentary evidence, the inference of accommodation entries is not sustainable. Ratio vs. Obiter: Ratio - where subscription is evidenced by bank transfers, filed returns/audited accounts and director confirmations and Revenue offers no contrary admissible material, addition u/s 68 cannot be sustained merely on short-notice non-production or inference from low bank balances; insistence on in-person production within an inadequately short timeframe is not determinative. Obiter - comments on broad policy of departmental scrutiny and observations about prosecutorial zeal. Conclusions: The Tribunal held the additions u/s 68 to be unjustified on the facts and allowed deletion of the Rs. 8,00,00,000 addition (identity, creditworthiness and genuineness established). The Tribunal also observed that the AO should have pursued further verifications if necessary rather than drawing adverse presumptions. Issue 2: Addition of commission (2% on alleged accommodation entry) as unexplained expenditure Legal framework: Unexplained expenditure additions require evidence of payment or credible basis to impute expense; imposition cannot rest on conjecture without material proof of commission arrangement or payment. Precedent Treatment: The AO and first appellate authority imputed a market-rate commission (2%) as a customary cost of accommodation entries. The Tribunal examined whether such an inference was supported by any material. Interpretation and reasoning: The Tribunal found the AO's approach to be speculative and unsupported by any documentary or testimonial evidence showing payment, contractual arrangement or agency for commission. The first appellate authority confirmed the AO's addition by relying on precedents but without engaging with the factual matrix. The Tribunal held guesswork and perfunctory reliance on generic rates cannot substitute for positive proof. Ratio vs. Obiter: Ratio - additions for alleged commission cannot be made in the absence of any material evidencing payment or obligating the assessee; an AO cannot mechanically apply a presumed market-rate commission to impugn bona fide capital subscriptions. Obiter - observations criticizing reliance on case law without factual engagement. Conclusions: The Tribunal deleted the Rs. 16,00,000 addition relating to presumed commission and allowed the related ground. Issue 3: Treatment of intraday (Code 03) losses as speculative under sec. 43(5) and entitlement to set-off against derivative/commodity profits Legal framework: Section 43(5) defines speculative transactions and provides exceptions/adaptations for eligible transactions in derivatives and trading on recognized exchanges (including provisos/explanations introduced/amended by Finance Acts), and distinctions based on levy of STT/CTT have been introduced in the legislative scheme. The provisos and explanations to s. 43(5) (clauses (d) and (e) and their definitions of 'eligible transaction') are material to classify transactions as speculative or not. Precedent Treatment: The AO treated intraday non-STT transactions as speculative and denied set-off against business profits; the assessee contended that the amendment to s. 43(5) and the concept of 'eligible transaction' render the AO's approach incorrect, particularly where commodity derivatives include both CTT-liable and CTT-exempt segments. The Tribunal noted that the authorities below failed to apply the amended statutory provisions correctly. Interpretation and reasoning: The Tribunal analyzed that intraday trading by its nature typically lacks transfer/delivery and that the statutory amendments (and provisos/explanations) recognize trading in derivatives on recognized exchanges as 'eligible transactions' for non-speculative treatment where carried out through prescribed intermediaries and systems. The AO's reliance on the presence/absence of STT/CTT alone to segregate profits and losses led to inconsistent treatment where both profit and loss arise from similar derivative activity. Because the lower authorities did not appreciate or apply the amended text of s. 43(5) and its provisos/explanations, the Tribunal considered it appropriate to remit the matter to the AO for fresh verification and adjudication in accordance with the amended statutory provisions. Ratio vs. Obiter: Ratio - proper application of amended s. 43(5) (including provisos/explanations) is necessary before declaring a trading segment speculative and denying set-off; where lower authorities omit consideration of such amendments, remand is appropriate. Obiter - discussion on commercial impracticability of intraday delivery as background context. Conclusions: The Tribunal set aside the denial of set-off for statistical purposes and remitted the issue to the AO to decide afresh applying the amended provisions of s. 43(5) and verifying facts in accordance with law; Ground Nos. C & D allowed for statistical purposes. Issue 4: Penalty u/s 271(1)(c) Legal framework: Penalty under s. 271(1)(c) is consequential upon findings of concealment or furnishing inaccurate particulars; its adjudication typically follows assessment determinations. Interpretation and reasoning: Given the Tribunal's deletions and remand on material substantive issues, the penalty issue was consequential and thus not adjudicated on merits by the Tribunal. Ratio vs. Obiter: Ratio - consequential penalties are to be considered after finalization of substantive assessment adjustments. Obiter - none. Conclusions: Penalty u/s 271(1)(c) not adjudicated by the Tribunal (left open/consequential). Overall Disposition The Tribunal deleted the additions under s. 68 and the imputed commission addition, remitted the question of set-off/speculative treatment under s. 43(5) to the AO for fresh decision applying the amended statutory provisions, and did not adjudicate the consequential penalty. The conclusions are fact-specific and rest on documentary banking evidence, statutory interpretation of s. 43(5) provisos/explanations, and the absence of contrary material by Revenue.