Addition under s.68 deleted as cash credits proved; ad hoc 10% expense disallowance removed for company-assessee

ITAT Delhi allowed the assessee's appeal. It held that the addition under s. 68 for unexplained cash credit was unsustainable where the assessee had furnished complete details establishing identity, creditworthiness, and genuineness of the subscriber companies, all payments were through banking channels, and the AO produced no contrary evidence. The Tribunal reiterated that suspicion, however strong, cannot replace proof and that assessments cannot rest on mere conjecture. Consequently, the addition under s. 68 was deleted. Further, relying on HC precedent that a company is distinct from its directors and the concept of "personal use" is inapplicable, ITAT also deleted the ad hoc disallowance of 10% of various expenses.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the addition under section 68 in respect of share capital call money and share premium received from corporate investors could be sustained where (i) the Assessing Officer relied on a third-party statement that was neither supplied to the assessee nor subjected to cross-examination, and (ii) the assessee had furnished documentary evidence establishing identity, creditworthiness and genuineness, and similar receipts in earlier/subsequent years were accepted.

1.2 Whether, for the relevant assessment year, the onus under section 68 extended to explaining the "source of source" in the hands of the share subscriber companies in light of the subsequent amendment by Finance Act, 2022.

1.3 Whether ad hoc disallowance of a percentage of expenses on account of "personal use" is permissible in the hands of a private limited company, in the absence of specific defects in the books or expenditure.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2 - Addition under section 68 on share capital call money and share premium received from corporate investors

Legal framework (as discussed)

2.1 The Tribunal examined section 68 in the context of share capital / share premium received from companies, and the established requirements of proving identity, creditworthiness of investors and genuineness of transactions.

2.2 The Tribunal referred to decisions of the Supreme Court and High Courts emphasising: (i) the requirement of supplying material relied upon by the Revenue and granting opportunity of cross-examination of witnesses whose statements are used against the assessee; (ii) that suspicion, however strong, cannot substitute evidence; and (iii) that once the assessee has discharged its initial onus with supporting documents, additions cannot be made without cogent contrary material.

2.3 The Tribunal also noticed the Finance Act, 2022 insertion of a second proviso to section 68 regarding the obligation to explain the "source of source" in the hands of creditors/entry providers, and expressly recorded that this amendment applies prospectively from assessment year 2023-24 and not to the year under consideration.

Interpretation and reasoning

2.4 The assessee had received call money (including share premium) from eight corporate entities in respect of shares already allotted in earlier years. Detailed particulars were furnished during assessment: identity documents, income tax returns, bank statements, financial statements and evidences of reserves and surplus of investor companies, as well as proof of receipt of funds through banking channels.

2.5 The Assessing Officer treated the entire call money as unexplained under section 68, primarily on the allegation that some of the subscriber companies lacked creditworthiness and were accommodation entry providers, relying on the statement of one third party (alleged entry operator) recorded by the Investigation Wing.

2.6 The Tribunal found that: (i) the said statement was never confronted to the assessee during assessment; (ii) no copy of the statement was provided; (iii) no opportunity for cross-examination was afforded; and (iv) in the remand report, the Assessing Officer himself admitted that the statement was not available in the assessment folder and had not been received from the Investigation Wing. In such circumstances, the Tribunal held that the statement could not be used as evidence against the assessee nor form the sole basis of addition.

2.7 The Tribunal applied the principles laid down by the Supreme Court that additions based on statements of third parties are unsustainable where the statement is not supplied and cross-examination is denied, holding that the duty lies on the Assessing Officer to confront such material before drawing adverse inferences.

2.8 The Tribunal noted that the assessee had been receiving share application money, allotment money and other call monies with respect to the same shares in preceding and succeeding years from the same companies, and that such receipts had been accepted by the Department without any adverse inference. Applying the principle of consistency, it held that the creditworthiness and genuineness of the same subscribers could not be selectively doubted only in the year under appeal without fresh adverse material.

2.9 The Tribunal also observed that: (i) the assessee was engaged in regular business, showing substantial turnover and profits; (ii) low fixed assets alone could not be a valid ground to doubt share premium; and (iii) the subscriber companies had adequate reserves and surpluses on record, and were shown as active in MCA records. No material was brought on record by the Assessing Officer to demonstrate that the funds in the hands of subscriber companies were non-genuine or that the assessee had provided unaccounted cash in lieu of the call money.

2.10 The Tribunal reaffirmed that the addition under section 68 cannot rest on mere suspicion or preponderance of probabilities; concrete evidence is required to show that the ostensible investors are name-lenders or that the assessee's own unaccounted money is routed back, which was absent in the present case.

2.11 On the "source of source", the Tribunal expressly held that the second proviso to section 68 introduced by Finance Act, 2022, mandating explanation of source in the hands of the creditor, is prospective from assessment year 2023-24, and has no application to the assessment year in question. Consequently, the assessee's obligation was confined to proving the identity of the investors, their creditworthiness, and the genuineness of the transactions, which was found to be discharged.

Conclusions

2.12 The Tribunal held that:

(a) The reliance placed by the Assessing Officer on the un-confronted, unavailable third-party statement, without providing a copy or cross-examination, violated principles of natural justice; such a statement could not form the basis of addition under section 68.

(b) The assessee had duly established the identity, creditworthiness of the subscriber companies and genuineness of the share call money transactions through documentary evidence and banking channels.

(c) The Department itself had accepted similar receipts from the same subscribers in earlier and subsequent years, and no contrary evidence was produced to justify a different view for the year under appeal.

(d) The post-2022 "source of source" requirement under section 68 was inapplicable to the relevant assessment year.

2.13 Accordingly, the addition under section 68 in respect of the share call money and premium was deleted and the related grounds were allowed.

Issue 3 - Ad hoc disallowance of expenses in hands of a company on account of "personal use"

Legal framework (as discussed)

3.1 The Tribunal considered the principle that a company is a separate legal and assessable entity distinct from its directors, as recognised by the High Court, and examined whether the concept of "personal use" can be applied to corporate expenditure in the same manner as for individuals or proprietors.

Interpretation and reasoning

3.2 The Assessing Officer had disallowed a portion of various expenses on an ad hoc basis on the ground that an element of personal use could not be ruled out. The first appellate authority reduced the disallowance to 10% of the total expenses without pointing out any specific instance or defect.

3.3 The Tribunal noted that the assessee was a private limited company, a separate legal entity, and that the concept of personal expenditure does not ordinarily arise in respect of a company, since all expenses are, in law, incurred for business purposes of the company, even if they incidentally benefit directors or employees.

3.4 The Tribunal further observed that no specific defect in the books of account, no particular voucher, and no concrete instance of non-business expenditure had been identified by the Assessing Officer or the appellate authority; the disallowance was purely estimative and based on conjecture.

Conclusions

3.5 The Tribunal held that ad hoc disallowance on the ground of possible "personal use" is impermissible in the case of a company without pinpointing specific instances of non-business expenditure or defects in the accounts.

3.6 Accordingly, the 10% disallowance of expenses sustained by the appellate authority was deleted and this ground was allowed.

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