Share Premium Received Through Verified Investors Cannot Be Treated as Bogus Cash Credit: ITAT Delhi

Saffron Groceries Pvt. Ltd. Vs ITO (ITAT Delhi)

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) allowed the assessee’s appeal and deleted an addition of ₹45 lakh made under Section 68 of the Income Tax Act, 1961 in respect of share capital and share premium received from two investor companies.

The dispute related to Assessment Year 2016-17, where the Assessing Officer treated share application money and share premium received from M/s Pearl Multicon Private Ltd. and M/s Pearl Propcon Private Ltd. as bogus cash credits. The assessee had issued 56,250 equity shares having a face value of ₹10 each at a premium of ₹70 per share. The Assessing Officer raised doubts regarding the genuineness of the transactions and the creditworthiness of the investors and consequently made an addition of ₹45 lakh under Section 68.

The assessee argued that it had discharged the burden required under Section 68 by furnishing bank statements, tax audit reports, balance sheets, profit and loss accounts, income tax return acknowledgements, computation of income, share application forms, and confirmations from the investor companies. Notices issued by the Assessing Officer under Section 133(6) were also replied to by both investors. The assessee further submitted that the valuation of shares was carried out in accordance with Rule 11UA(2)(a) of the Income Tax Rules using the Net Asset Value method.

During the hearing, the assessee also produced copies of annual returns filed before the Registrar of Companies for the financial year ending 31 March 2016. The Tribunal noted that these records showed an increase in the company’s equity share capital during FY 2015-16 and confirmed allotment of shares to the two investor companies. The list of shareholders filed with the annual return also reflected the names and shareholding percentages of the investors, which, according to the Tribunal, established the genuineness of the share allotment transaction.

The Tribunal further observed that in an earlier case involving one of the same investor companies, Pearl Multicon Private Ltd., another coordinate bench of the Tribunal had already accepted the identity, creditworthiness, and genuineness of the shareholder. The Tribunal also relied on the Supreme Court judgment in CIT vs. Lovely Exports Pvt. Ltd., which held that if share application money is received from alleged bogus shareholders whose details are disclosed to the Assessing Officer, the Department may proceed against those shareholders separately, but such amounts cannot automatically be treated as undisclosed income in the hands of the assessee company.

Based on the facts and judicial precedents, the Tribunal found no merit in the addition made under Section 68 and directed deletion of the ₹45 lakh addition. The impugned order of the CIT(A) was set aside and the appeal of the assessee was allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals) [Addl./ JCIT(A)-2], Mumbai [for short, CIT(A)] dated 17.11.2025, for A.Y. 2016-17.

2. The assessee in appeal has raised following grounds of appeal:

“1. That the Ld. AddI/JCIT (A)-2, Mumbai has grossly erred in law as well as on facts in sustaining the addition of Rs. 45,00,000/- made by Ld. AO u/s 68 of the IT Act, 1961 on account of share capital and share premium received from the shareholders, whose nature and source of credit have been explained and details have been furnished by the appellant, thereby, discharging the burden u/s 68 of the Act.

2. That the order passed by Ld. AddI/JCIT (A)-2, Mumbai is bad in law as the same has been passed without appreciating that the investor companies are separate Income-tax-assesses and the explanation and documents sought have duly been furnished which have not been controverted, and therefore cannot be rejected arbitrarily.

3. That the Ld. CIT(A), Addl/JCIT (A)-2, Mumbai has grossly erred in law as well as on facts in not appreciating the fact that valuation of shares was made in accordance with the Rule 11UA(2)(a) of Income Tax Rules, 1962 i.e., Net Asset Value Method, which is one of the prescribed methods for valuation of shares.

4. That Ld. Addi/JCIT (A)-2, Mumbai erred in law as well as on facts in not admitting additional evidences filed under Rule 46A of the Income Tax Rules, 1962 and rejecting the same in an arbitrary manner.”

3. The assessee in appeal has assailed the order of CIT(A) in confirming addition of Rs. 45,00,000/- made u/s 68 of the Income Tax Act, 1961 [hereinafter referred to as, “the Act”], on account of share capital and share premium received from:

i. M/s Pearl Multicon Private Ltd.

ii. M/s Pearl Propcon Private Ltd.

4. Shri Rajiv Saxena, appearing on behalf of the assessee submits that the addition has been made by the AO in respect of share capital and share application money received from the investors as under:

4.1 The assesse had issued 56,250 equity shares having face value of Rs. 10 at a premium of Rs. 70/- to the aforesaid two investors. There is no dispute with regard to valuation of shares. The AO has made addition raising doubt over the creditworthiness of the investors. The AO had issued notice u/s 133(6) to both the investors. Both the investors replied to the said notice of the AO, however, the AO held the share application money and the share premium received from the investors as bogus transaction and made addition of Rs. 45,00,000/- u/s 68 of the Act. The ld. Counsel submits that to discharge onus to prove creditworthiness of the investors, the assessee had furnished bank statements, copy of Tax Audit Report, Balance Sheet and Profit-Loss account for F.Y. 215-16, copy of acknowledgement of Return of Income along with the computation, Share Application form and confirmation of accounts. The AO disregarded all the documents furnished by the assessee. The ld. Counsel contended that in the case of Geranium Bakers Private Ltd in ITA No; 102/Del/2021 for A.Y. 2016-17, decided on 06.11.2024, the Division Bench of the Tribunal has accepted the creditworthiness and genuineness of both the companies i.e. M/s Pearl Multicon Pvt. Ltd. and M/s Pearl Propcon Pvt. Ltd.

5. Per contra, Shri Manoj Kumar, Sr. DR, representing the department vehemently supporting the impugned order prayed for dismissing appeal of the assessee. He submits that the assessee has failed to substantiate genuineness of the transaction and creditworthiness of the investors.

6. Both sides heard. Orders of the lower authorities below examined. The assessee has received share application money along with share premium from two investors as detailed in the chart given above. The solitary dispute in the instant appeal is, doubt raised by the AO over the creditworthiness of the investors and genuineness of the transaction, thus leading to addition of Rs. 45,00,000/- u/s 68 of the Act. During the course of hearing of present appeal, the assessee had furnished copy of Annual Return filed before the Registrar of Companies [for short, RoC] for financial year ending on 31.03.2016. A perusal of Annual Return shows that there has been increase in equity share capital during the F.Y. 2015­16. The assessee has issued fresh 56,250 equity shares having face value of Rs. 10/- each during the relevant period. Along with annual return, the assessee has also furnished list of shareholders. A perusal of the same reveals name of Pearl Propcon Private Ltd. and Pearl Multicon Private Ltd. as shareholders along with their percentage of holding of total shares of the company. This clearly shows that the transaction of allotment of shares was genuine.

7. In so far as creditworthiness of the investors is concerned, I find that Division Bench of the Tribunal in the case of Germanium Bakers Private Ltd. (supra) wherein one of the investors is common i.e. Pearl Multicon Private Ltd., the Tribunal has accepted, identity, creditworthiness and genuineness of the shareholders.

8. The Hon’ble Apex Court, in the case of CIT Vs. Lovely Exports Private Ltd. 216 CTR 195 has held that if share application money is received by the assessee company from alleged bogus shareholders, whose name are given to the assessing officer, the Department is free to proceed to re-open their individual assessment in accordance with the law but the amount of share application money cannot be regarded as undisclosed income u/s 68 of the Act in the hands of the assessee company.

9. Thus, in light of facts of the case and the law expounded by the Hon’ble Supreme Court of India in the case of Lovely Export (P) Ltd (supra), I find no merit in the addition made by the AO u/s 68 of the Act. Accordingly, the addition of Rs. 45,00,000/- is directed to be deleted.

10. In the result, impugned order is set-aside and appeal of the assessee is allowed.

Order pronounced in the Open Court on 25.03.2026.