2025 (11) TMI 102 - HC - Income Tax

Bogus share capital and share premium under Section 68: appeal allowed after identification of shareholders and verified sources

Section 68 was examined in relation to alleged bogus share capital and share premium where the AO doubted shareholder identity after directors failed to ... Addition u/s 68 - bogus share capital and share premium - Directors did not appear pursuant to the summons issued u/s 131 - on absence of attendance by the Directors of the assessee, the AO proceeded to doubt the identity and creditworthiness of the shareholders and the genuineness of the transactions - HELD THAT:- Section 68 allows the AO on his subjective satisfaction arrived at and on the basis of the appreciation of the materials placed before him, to charge the sum credited in the books of the assessee to income tax of the assessee as income of the assessee. There are three provisos to Section 68 of the Act of 1961. The first proviso deals with a loan or borrowing. The second proviso deals with share application money and the third proviso speaks about venture capital fund. Assessee issued allotted shares at a premium. Therefore, at the highest, the second proviso to Section 68 will come into operation, assuming though not admitting that the first part of Section 68 of the Act of 1961 stands satisfied. In the facts and circumstances of the present case, the consistent finding of the appellate authority and the income tax appellate tribunal is that, the persons who applied for the shares stand identified and that, the assessee offered sufficient explanation about the nature of the transactions in question. In course of hearing before us, the appellant is not in a position to produce any additional or new materials to substantiate that, the concurrent finding of fact by the two authorities, namely, the appellate authority and the income tax tribunal with regard to the explanation offered by the assessee is perverse. As decided in M/s. Naina Distributors Pvt. Ltd. [2023 (6) TMI 1362 - CALCUTTA HIGH COURT] as found in the facts and circumstances of that case that, the transaction in share allotment in respect of the assessee concerned, was verified independently and that, independent verification did not render any finding so as to invoke Section 68. The shareholders who applied for the shares in the assessee stands identified. The source of funds stands satisfied. The assessee reflected the entire issue and allotment of shares at a premium in its books of accounts and submitted the same contemporaneously to the statutory authority, namely, Ministry of Corporate Affairs. Before the Assessing Officer, the assessee produced all such relevant materials with regard to the transaction in question. The absence/non-appearance of the Directors of the assessee before the Assessing Officer would not prompt the AO, to render a finding that no explanation within the meaning of Section 68 was offered by the assessee particularly in the factual matrix of the present case. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Income Tax Appellate Tribunal was justified in reversing the Assessing Officer's addition under Section 68 of the Income Tax Act in respect of share capital and share premium where the subscribers' identity and source of funds were, on the material, established. 2. Whether the non-appearance of the company's directors in response to summons under Section 131, without more, permits the Assessing Officer to treat the explanation tendered by the company regarding share issuance and premium as unsatisfactory and to invoke Section 68. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reversal of Section 68 addition where identity and source are established Legal framework: Section 68 permits charging to tax any sum credited in the books where the assessee offers no explanation or an explanation which, in the opinion of the Assessing Officer, is not satisfactory. The second proviso specifically requires that where the sum credited consists of share application money, share capital or share premium in a non-public company, the person in whose name the credit is recorded (i.e., the subscriber) must also offer an explanation about the nature and source of such sum and the Assessing Officer must find it satisfactory. Precedent treatment: The Tribunal and the appellate authority accepted the evidentiary material produced by the assessee and held that the identity of subscribers and source of funds were established. The Court noted a co-ordinate Bench decision (referenced by the assessee) where independent verification of share allotment facts led to non-invocation of Section 68; that decision was relied upon rather than distinguished. Interpretation and reasoning: The Court examined the materials placed on record by the company: return filing acknowledgement, audited balance-sheet, bank statements, Form of return of allotment filed with corporate authorities, confirmations and source-of-funds documentation from subscribers. The appellate authorities' concurrent findings were that subscribers were identified and explanation of nature of transactions was satisfactory. The Court emphasised that Section 68 involves subjective satisfaction of the Assessing Officer based on appreciation of materials, but where the assessee produces contemporaneous statutory records and verifiable bank/filing evidence, a contrary finding of no explanation must be demonstrably perverse to be interfered with on appeal. The Court found no additional material before it to show perversity in the concurrent findings of the two authorities below and accepted their conclusion that Section 68 could not be invoked on the given facts. Ratio vs. Obiter: Ratio - Where a company records share issue with contemporaneous statutory filings and verifiable banking and subscriber confirmations establishing identity and source of funds, an Assessing Officer's addition under Section 68 can be set aside; concurrent findings of identification and sufficiency of explanation are binding unless shown to be perverse. Obiter - Reliance on the cited co-ordinate Bench decision is supportive but not treated as a broader rule beyond the facts examined. Conclusion: The Tribunal was justified in reversing the Section 68 addition because the subscribers were identified and the source/nature of funds for share capital and premium were satisfactorily explained on the record; no substantial question of law arises on this aspect. Issue 2 - Consequences of directors' non-appearance under Section 131 on sufficiency of explanation under Section 68 Legal framework: Section 131 empowers the Assessing Officer to summon persons and require attendance; non-compliance may permit adverse inference but cannot automatically replace the statutory requirement under Section 68 that the assessee or the person in whose name credit is recorded must offer a satisfactory explanation. Precedent treatment: The lower authorities evaluated the available documentary and corroborative material despite the non-appearance of directors; the Court referred to that approach approvingly and rejected an automatic legal consequence from non-appearance alone. Interpretation and reasoning: The Court held that the mere absence/non-appearance of directors in response to a Section 131 summons does not automatically justify a finding that no explanation within the meaning of Section 68 was offered. Where the assessee has produced contemporaneous statutory filings, bank records and confirmations from subscribers, the Assessing Officer must consider the material on record. An adverse inference based solely on non-appearance, without demonstrating that documentary/material evidence was insufficient or unreliable, cannot sustain an addition under Section 68. The Court reasoned that the factual matrix showed adequate contemporaneous evidence and independent filings; thus non-appearance did not render the explanation unsatisfactory as a matter of law or fact. Ratio vs. Obiter: Ratio - Non-appearance of directors under Section 131, in isolation, is not a ground to treat explanations as unsatisfactory for the purposes of Section 68 when contemporaneous and corroborative documentary evidence identifying subscribers and source of funds exists. Obiter - The Court's observations as to the weight to be attached to Section 131 compliance are contextual to the facts and do not amount to a categorical rule for all cases. Conclusion: The Assessing Officer erred in treating non-appearance of directors as determinative of insufficiency of explanation; given the documentary and statutory filings produced by the company and the Tribunal's and appellate authority's concurrent factual findings, the Section 68 addition could not be sustained. Cross-reference and overall conclusion The two issues are interlinked: the Court's conclusion that the Tribunal rightly reversed the Section 68 addition rests both on the sufficiency of the contemporaneous documentary record establishing identity and source, and on the principle that non-appearance under Section 131 does not, by itself, render such documentary explanations unsatisfactory. The concurrent factual findings of the appellate authority and the Tribunal on identification and source were not shown to be perverse; accordingly, no substantial question of law warranted interference.