TaxTMI 
TaxTMI 
2026 (9) TMI 921
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....n was processed under section 143(1) of the Act. Subsequently, on the basis of information received by the Assessing Officer, the assessment was reopened by issuance of notice under section 148 of the Act dated 30.03.2018. In response thereto, the assessee filed an e-return on 23.05.2018, declaring the same total income of Rs. 213/-. After completion of the reassessment proceedings, the Assessing Officer determined the total income of the assessee at Rs. 2,63,00,210/- by making the following additions under section 68 of the Act: Particulars Amount Receipt from M/s Ratnakar Merchandise Pvt. Ltd., treated as unexplained cash credit Rs.1,76,50,000/- Amount invested in M/s Teju Estate Pvt. Ltd., treated as unexplained cash credit Rs.86,50,000/- Total additions Rs.2,63,00,000/- 3. In the first appeal, the CIT(A) deleted the addition of Rs. 86,50,000/- on the ground that the said amount represented an outflow of funds and, therefore, could not be brought to tax as a cash credit under section 68 of the Act. The CIT(A), however, confirmed the addition of Rs. 1,76,50,000/- relating to the amount received from M/s Ratnakar Merchandise Pvt. Ltd. The assessee is, th....
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....eated as unexplained income under section 68 of the Act. 4.2. In response to the notices issued during the reassessment proceedings, the assessee furnished, inter alia, the following documents: a) extracts of its bank statements; b) particulars of the shareholder; c) share application forms; d) share allotment letters; e) details of share application money and allotment of shares; f) copy of Form No. 2 filed with the Registrar of Companies; g) acknowledgement of the return of income of M/s Ratnakar Merchandise Pvt. Ltd.; h) extracts of the bank statements of the investor; and i) financial statements of M/s Ratnakar Merchandise Pvt. Ltd. for the financial year 2010-11. 4.3. The assessee submitted that the amount had been received from M/s Ratnakar Merchandise Pvt. Ltd., having PAN AADCR8555M and its address at 8B, Ganpat Bagla Road, 1st Floor, Kolkata-700007. It was explained that the assessee received an aggregate amount of Rs. 1,76,50,000/- from the said company. Out of this amount Rs. 1,50,00,000/- was appropriated towards allotment of 30,000 equity shares at Rs. 500/- per share, comprising fac....
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....ot demonstrated any substantial business activity or underlying asset capable of supporting a premium of Rs. 490/- per share. The Assessing Officer was also of the view that the assessee's contention regarding the prerogative of the Board of Directors to determine the premium did not satisfactorily establish the genuineness of the transaction or the financial capacity of the subscriber. 4.8. The Assessing Officer referred to the decision of the Kolkata Bench of the Tribunal in Bisakha Sales P. Ltd., ITA No.1493/Kol/2013, and the decision of the Hon'ble Bombay High Court in Major Metals Ltd. v. Union of India, Writ Petition No.397 of 2011. On the basis of the non-service of notice under section 133(6), the low returned income of the investor, the financial position of the assessee, and what he considered to be the absence of justification for charging the premium, the Assessing Officer held that the entire amount of Rs. 1,76,50,000/- represented unexplained cash credit. He accordingly added the same to the total income of the assessee under section 68 of the Act and also initiated penalty proceedings under section 271(1)(c) of the Act. 4.9. Before the CIT(A), the assessee reit....
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....stablish the identity of the creditor or investor; the creditworthiness or capacity of the creditor or investor; and the genuineness of the transaction. 5. In support of these principles, the CIT(A) referred, inter alia, to the decisions in CIT v. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal), Kale Khan Mohammad Hanif v. CIT (1963) 50 ITR 1 (SC), Roshan Di Hatti v. CIT (1977) 107 ITR 938 (SC), CIT v. Oasis Hospitalities Pvt. Ltd. (2011) 333 ITR 119 (Delhi), CIT v. Kamdhenu Steel & Alloys Ltd., 206 Taxman 254 (Delhi), Sumati Dayal v. CIT (1995) 214 ITR 801 (SC), CIT v. P. Mohanakala (2007) 291 ITR 278 (SC), PCIT v. NDR Promoters Pvt. Ltd. (2019) 410 ITR 379 (Delhi), Nemi Chand Kothari v. CIT (2003) 264 ITR 254 (Gauhati), CIT v. N.R. Portfolio (P.) Ltd. (2014) 42 taxmann.com 339 (Delhi), and PCIT v. NRA Iron and Steel Pvt. Ltd. (2019) 412 ITR 161 (SC). 6. The CIT(A) held that the financial position of the assessee and that of the share applicant did not justify the substantial share premium and, therefore, the genuineness of the transaction remained unproved. He observed that the assessee had relied upon the prerogative of the company to determine the premium and the wis....
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....ssessment year 2013-14. According to the learned AR, there was no statutory restriction upon charging share premium during the relevant assessment year. It was also submitted that the valuation made by the assessee under the discounted cash flow method was sufficient to support the premium charged. 11. Elaborating upon the composition of the aggregate receipt of Rs. 1,76,50,000/-, the learned AR submitted that only Rs. 1,50,00,000/- represented consideration received upon allotment of shares, comprising share capital of Rs. 3,00,000/- and share premium of Rs. 1,47,00,000/-. Out of the remaining amount of Rs. 26,50,000/-, a sum of Rs. 11,50,000/- was retained as share application money and was separately reflected on the face of the balance sheet. The balance amount of Rs. 15,00,000/- represented the consideration received by the assessee upon sale of shares or investments to M/s Ratnakar Merchandise Pvt. Ltd. 12. The learned AR also submitted that the extended requirement under the proviso to section 68, requiring an assessee-company to explain the source of the funds in the hands of a resident shareholder, was inserted with effect from assessment year 2013-14 and was not app....
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.... of an assessee, the assessee is required to offer a satisfactory explanation regarding its nature and source. In the context of share capital and share premium, the enquiry ordinarily encompasses the identity of the investor, its financial capacity and the genuineness of the transaction. These requirements are interconnected, but each calls for an independent examination. 18.2. Corporate identity and movement of funds through banking channels constitute relevant evidence. They do not, however, invariably establish that the transaction was genuine in substance. Conversely, a transaction cannot be rejected merely because the premium appears high, the parties reported nominal taxable income, or the Assessing Officer considers the investment commercially imprudent. The conclusion must be founded upon the cumulative effect of the contemporaneous evidence and surrounding circumstances. 18.3. Section 56(2)(viib) was not applicable to assessment year 2011-12. The subsequently inserted proviso to section 68, requiring an assessee-company in the specified circumstances to explain the source of funds in the hands of a resident shareholder, was also not applicable to the year under cons....
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....is transaction. 19.6. The financial statements thus give rise to the following unanswered questions: a) What was the precise nature of each component of Rs. 1,76,50,000/-? b) Was the amount of Rs. 15,00,000/- genuinely received against a transfer of an identifiable investment? c) Which shares or securities were transferred for Rs. 15,00,000/- ? d) Were those securities removed from the assessee's investment schedule and correspondingly recorded in the investor's accounts? e) Were the transfer forms, debit note, ledger entries and consideration mutually reconcilable? f) What subsequently happened to the share application money of Rs. 11,50,000/-? 19.7. These questions cannot be answered merely from the broad finding that the entire receipt represented unexplained share premium. Each component requires an independent factual determination. 20.1. The assessee's profit and loss account records service charges of Rs. 18,000/- and profit before tax of Rs. 213.02. Thus, it had negligible operational income during the relevant year. 20.2. At the same time, its balance sheet records investments of Rs. 4,59,62,000/- as on 31.0....
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.... infrastructure activities. The Memorandum of Association and the object clause in force during financial year 2010-11 have not been placed before us. 21.2. The name of a company does not conclusively determine its authorised activities. Nevertheless, in the present circumstances, the following questions have a direct bearing upon the commercial rationale: a) Did the main objects of the assessee authorise investment and trading as its primary business? b) Was investment in shares merely an ancillary or incidental object connected with an infrastructure business? c) If investment was only an ancillary object, what infrastructure activity was actually carried on? d) Did the assessee possess any infrastructure project, fixed assets, employees, contracts or operating establishment? e) Was the object clause amended before or during the relevant year to authorise investment activity? f) Were the investments approved by the board in accordance with the company's authorised objects? g) Did the assessee continue to hold itself out as an investment company in the subsequent years? 21.3. If investment and trading formed part....
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....t was the basis upon which the investor itself issued shares at a premium of Rs. 990/- per share? b) Who subscribed to the investor's shares and for what commercial purpose? c) Did the investor have underlying business or assets justifying its own share premium? d) Was investment in other companies authorised as its principal business? e) Why did it decide to invest Rs. 1,50,00,000/- in the assessee? f) How did it identify the assessee as an investment opportunity? g) What due diligence or valuation did it undertake? h) What return or commercial benefit did it expect? i) Did it exercise an independent investment decision or merely transmit funds received from other entities? 22.7. These questions assume significance because the source of the investor's apparent financial capacity and the commercial substance of its investment are inseparably connected with the enquiry into genuineness. They cannot be answered from the face of the balance sheet alone. 23.1. The investment schedule of M/s Ratnakar Merchandise Pvt. Ltd. records an investment of Rs. 1,50,00,000/- in the assessee. This corresponds with the sha....
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....nts and transferring them shortly thereafter to various companies. 24.4. This pattern raises further questions: a) What was the nature of the immediately preceding credits? b) Under what transactions did the investor receive those amounts? c) Did the credits represent its own share capital and premium or some other receipt? d) Did the investor possess and exercise independent control over the funds? e) Were the amounts received with any understanding that they would be transferred to specified companies? f) Was there any circular or reciprocal movement of funds? g) Did the assessee or any connected person provide funds, directly or indirectly, to the entities from which the investor received the antecedent credits? h) Were the companies from which the funds were received connected with the assessee, the investor or the investee companies? 24.5. The proximity between the credits and onward transfers is a relevant circumstance giving rise to suspicion. It is not, without further enquiry, conclusive proof that M/s Ratnakar Merchandise Pvt. Ltd. was an accommodation-entry provider or that the funds belonged t....
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....ablish: a) whether those companies were carrying on any real business when the investments were made; b) whether they owned substantial assets; c) whether the shares were actually allotted or transferred to the assessee; d) whether the assessee exercised ownership rights over those shares; e) whether the values recorded in the assessee's books represented genuine commercial values; f) whether those companies generated any income or return for the assessee; g) whether the investments were subsequently retained, realised, impaired or written off; or h) whether the companies remained active or were subsequently struck off, dissolved, amalgamated or liquidated. 26.2. The subsequent status of the investee companies is not determinative of their value in financial year 2010-11. A company becoming inactive after several years would not, by itself, establish that the original investment was not genuine. Conversely, if an investee company had no discernible business or assets even at the time of investment and subsequently disappeared without generating any return, that circumstance may have corroborative relevance. The prese....
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....de without reconciling the investment portfolio of Rs. 4,59,62,000/- disclosed in its balance sheet. 28.5. The CIT(A) reproduced general principles governing section 68 but did not answer the factual questions arising from the audited accounts and bank statements. The written submissions filed on 19.06.2023 and the documents accompanying them were not examined by recording transaction-specific findings. The corresponding entries in the books of both companies, the composition of the receipt, the investor's own fund-raising exercise, the bank trail and the commercial rationale remained unexamined. 29.1. The evidence presently available supports certain aspects of the assessee's case. The identity of the investor is prima facie supported by statutory and financial documents. The movement of funds through its disclosed bank account is demonstrated. The accounts of both companies contain corresponding entries regarding the investment of Rs. 1,50,00,000/- and share application money of Rs. 11,50,000/-. The assessee also possessed an investment portfolio which could not have been ignored while considering the basis of its share value. 29.2. Simultaneously, the material raises su....
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....s scope. It is neither intended to build a fresh case for the Revenue nor to presume the correctness of the assessee's explanation. Its purpose is to enable a proper determination of the questions already arising from the evidence on record. The Assessing Officer shall examine the matter afresh in the light of these questions and record clear findings on: a) the nature and source of each component of Rs. 1,76,50,000/-; b) the identity, real financial capacity and independent commercial role of M/s Ratnakar Merchandise Pvt. Ltd.; c) the commercial rationale and contemporaneous valuation supporting the subscription; d) the relevance of the immediate antecedent credits in the investor's bank account; e) the objects and actual business activities of the assessee and the investor; f) the genuineness and value of the material investments underlying the assessee's asserted share value; g) the status and conduct of the underlying investee companies at the relevant time; h) the subsequent treatment of the shares and investments, only as corroborative evidence; and i) whether the investor acted pursuant to an in....