2025 (10) TMI 193 - AT - Income Tax

Addition under Section 68 for share capital and premium from sister concerns deleted where identity, creditworthiness and genuineness proved

ITAT held that addition under section 68 for share capital/premium raised from sister concerns was rightly deleted by the CIT(A) because the assessee ... Addition u/s 68 - assessee has raised share capital/ share premium by issuing equity shares from sister concerns - CIT (A) deleted the addition by holding that the assessee has proved the identity and creditworthiness of the investors and genuineness of the transactions by filing all the evidences which appear to be genuine and correct - HELD THAT:- AO in the remand report has not adversely commented specifically on the identity of the investors and genuineness of the transactions and only stated that this creditworthiness of the parties does not appear to be not beyond doubt. We have also examined the details/ evidences filed before us and find that the assessee has duly discharged its onus by filing of the evidences before the ld. AO and also before the ld. CIT (A). Appeal of the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Appellate Tribunal should condone an inordinate delay (3026 days) in filing the appeal by the Revenue where non-service of the appellate order and lack of departmental alerts are asserted as reasons for delay. 2. Whether an addition under Section 68 (unexplained cash credit) can be sustained where share capital and share premium were raised from a sister concern, the assessee produced documents explaining the source, summons under Section 131 remained non-complied with, and the appellate authority relied on departmental verification/remand report indicating the investor's existence and bank transactions. 3. Whether, for the assessment year in question, the assessee was required to prove the 'source of source' (i.e., provenance of funds of the investor) in light of the statutory amendment to Section 68 that became effective from a later assessment year. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay in Filing Appeal Legal framework: The Tribunal has jurisdiction to condone delay in filing appeals where sufficient cause is shown. Administrative non-service of orders and failure of departmental notification systems are treated as potential sufficient causes where the default is bona fide. Precedent Treatment: The judgment follows established administrative law principles that governmental departments, while expected to follow internal procedures, may be granted relief where systemic failures or resource constraints prevented timely action; courts have discretion to condone delay after assessing bona fides and reasons. Interpretation and reasoning: The Tribunal examined the condonation petition which specifically pleaded (a) non-communication of the appellate order and absence of alerts (SMS/email/departmental modes), (b) late manual discovery of the order on the departmental system, and (c) acute work-pressure and insufficient system resources in the relevant months. The Tribunal noted that the Revenue is a government department operating through hierarchical files and that the stated reasons were genuine and bona fide. On the facts, non-service and systemic deficiencies constituted sufficient cause. Ratio vs. Obiter: Ratio - where there is prolonged delay attributable to non-service of appellate orders and systemic departmental deficiencies, the Tribunal may exercise discretion to condone delay after assessing bona fides. Conclusion: The Tribunal condoned the 3026-day delay and admitted the Revenue's appeal for adjudication on merits. Issue 2 - Sustainment of Addition under Section 68 where shares issued to sister concern and evidence produced Legal framework: Section 68 treats unexplained cash credits; for amounts received as share capital/share premium, the revenue must show the amount is unexplained or that the subscriber's identity, genuineness of transaction, or creditworthiness is not demonstrable. The assessee bears initial onus of furnishing details; the Revenue may probe by summons (e.g., under Section 131) and other verification. Precedent Treatment: The Tribunal relied on appellate authority decisions holding that where the identity and creditworthiness of the subscriber and genuineness of the transaction are established on facts, additions under Section 68 are not sustainable. Authorities have also held that where Revenue suspects bogus shareholders, it must investigate and tax the purported shareholders rather than simply add to the recipient assessee's income (pre-proviso jurisprudence). Interpretation and reasoning: The Tribunal examined the contemporaneous record: (a) declaration of share issue with premium; (b) production of documentary evidences before the Assessing Officer and further replies on appeal; (c) non-compliance with summons issued under Section 131 to a director; (d) remand report obtained by the appellate authority which recorded that the assessee was not a shell company, the investor existed at the given address, funds were routed through banking channels, and sources in the immediate hands of the investor were explained, though the AO noted residual doubts about creditworthiness; (e) rejoinder by the assessee addressing the remand report. The Tribunal accepted the appellate authority's factual finding that identity, genuineness and creditworthiness were satisfactorily proved on the basis of documents and departmental verification. The Tribunal emphasized that mere high premium or initial doubts do not, without more, permit an addition when primary evidence and verification show genuineness and bank channels were used. Ratio vs. Obiter: Ratio - where documentary evidence and departmental verification on remand demonstrate the identity and existence of the investor and traceability of funds through banking channels, an addition under Section 68 cannot be sustained merely because summons under Section 131 were not complied with or residual suspicion remains; the Revenue must produce positive material to displace the appellant's evidence. Conclusion: The Tribunal upheld the appellate deletion of the Section 68 addition and dismissed the Revenue's ground challenging that deletion. Issue 3 - Requirement to Prove 'Source of Source' for the Assessment Year in Question Legal framework: The Finance Act introduced a proviso/amendment to Section 68 with effect from 1 April 2013 (applicable to AYs from 2013-14 onwards) tightening the obligation to demonstrate source of funds. For earlier assessment years, the pre-amendment tests remained applicable: genuineness of transaction, identity of the investor, and capacity/creditworthiness of the investor as primary requirements. Precedent Treatment: The Tribunal relied on a High Court decision and a jurisdictional Tribunal decision holding that the proviso is prospective and not applicable to assessment years prior to its effective date, and therefore the assessee for those years is not required to prove 'source of source.' Those authorities were followed rather than distinguished. Interpretation and reasoning: Applying the temporal ambit of statute, the Tribunal found the amendment prospective and not retrospective; hence for the assessment year under consideration the statutory position remained the pre-proviso law. Consequently the assessee was not obliged to trace and establish the source of funds of the investor's own creditors (i.e., 'source of source') as a necessary precondition to discharge the onus under Section 68 for that year. The Tribunal also observed that courts have required Revenue, where alleging bogus shareholders, to proceed against those shareholders rather than directly adding the amount to the recipient's income under pre-amendment Section 68 principles. Ratio vs. Obiter: Ratio - for assessment years prior to the effective date of the amendment, the statutory proviso is inapplicable; therefore, the assessee need not prove 'source of source,' and the primary tests remain identity, genuineness and capacity of the investor. Conclusion: The Tribunal agreed with and applied precedents to hold the assessee was not required to prove 'source of source' for the assessment year in question, reinforcing the appellate deletion of the Section 68 addition.