ITO Vs Sitka Mercantile (ITAT Kolkata)
ITAT Kolkata held that addition of unexplained cash credit u/s 68 of the Income Tax Act unsustainable as identity, creditworthiness of the investors and genuineness of the transactions duly proved.
Facts- The assessee filed return of income u/s. 139(1) of the Act. The return was processed u/s. 143(1) of the Act. Thereafter the case of the assessee was reopened by issuing notice u/s 148 of the Act stating that the income of the assessee has escaped assessment. Thereafter during the course of reassessment proceedings, the AO called for various evidences substantiating/corroborating share application money received from share applicants thereby establishing identity and creditworthiness of the investors and genuineness of the transactions.
The AO issued notice u/s 142(1) of the Act calling upon the assessee to furnish evidences in respect of share subscription money received during the year. The AO was not convinced and satisfied with the explanation of the assessee and made the addition on the ground that the share premium charged by the applicant was bogus and the director of the assessee company has failed to produce the shareholders and justify the reasons for issuing shares at a high premium and thus made the addition of Rs. 11,07,50,000/- to the income of the assessee as unexplained cash credit u/s 68 of the Act.
Conclusion- We observe from the records before us and also from the appellate order that the assessee has furnished all the details/evidences qua the share applicants furnishing the names and addresses, PAN cards, share application forms, share allotment advices, confirmations, audited financial statements and also proof of source of source by furnishing necessary documents of the third parties.
In our opinion, the basis of making addition completely devoid of merit and substance. Not only the assessee has proved the identity and creditworthiness of the investors and genuineness of the transactions by furnishing all the evidences which unequivocally proved all these three ingredients of Section 68 of the Act.
We are of the view that the assessee has proved identity and creditworthiness of the shareholders and also the genuineness of the transactions. Therefore, we do not find any infirmity in the order of Ld. CIT(A) who has passed a very reasoned order by following various decisions as discussed therein and therefore we uphold the same by dismissing the appeal of the revenue.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This is the appeal preferred by the revenue against the order of the Ld. Commissioner of Income Tax (Appeals)5, Kolkata (hereinafter referred to as the Ld. CIT(A)”] dated 14.09.2020 for the AY 2009-10.
2. Condo nation petition not filed.
3. The only issue raised in the various grounds of appeal is against the deletion of addition of Rs. 11,07,50,000/- as made by the AO on account of unexplained share capital and share premium.
4. Facts in brief are that the assessee filed return of income on 18.07.2009 u/s 139(1) of the Act declaring total income of Rs. 8,734/-. The return filed by the assessee was processed u/s 143(1) of the Act. Thereafter the case of the assessee was reopened by issuing notice u/s 148 of the Act dated 06.06.2011 stating that the income of the assessee has escaped assessment. Thereafter during the course of reassessment proceedings, the AO called for various details/evidences substantiating/corroborating share application money received from share applicants thereby establishing identity and creditworthiness of the investors and genuineness of the transactions. During the course of reassessment proceedings, the AO even made an independent enquiry from some share holders by issuing notices u/s 133(6) of the Act which were duly served and responded by the said shareholders by filing the requisite documents and evidences comprising of copies of bank statements, audited financial statements, ITRs etc. and the AO after examining the details filed by the assessee as well as by the share applicants framed the assessment u/s 147/143(3) dated 30.09.2011 assessing the income at Rs. 3 1,207/-.
5. Thereafter the PCIT upon perusal of the assessment records exercised the revisionary jurisdiction and issued show cause notice dated 05.02.20 14 u/s 263 of the Act as to why the order passed u/s 147/143(3) should not be treated as erroneous and prejudicial to the interest of the revenue on the ground that the AO has failed to conduct the requisite enquiry for proving identity and creditworthiness of the share holders and genuineness of the transactions. Finally the PCIT revised the assessment order dated 10.03.20 14 by directing the AO to frame the assessee after conducting the necessary enquiry. The said order was not challenged before the Tribunal.
6. In the set aside assessment proceedings, the AO issued notice u/s 142(1) of the Act dated 22.05.20 14 calling upon the assessee to furnish details/evidences in respect of share subscription money received during the year. The assessee complied with the said notice by furnishing the details in respect of 15 share applicants comprising the details of shares allotted along with names and addresses of the allotted, copies of ITRs, confirmations from the investors, payments having been received by cheques and bank accounts of investors. The AO in order to independently verify these transactions has issued notices u/s 133(6) of the Act to all the 15 share applicants out of whom only 8 shareholders responded to the said notices and the remaining 7 was returned unserved. Thereafter the assessee again furnished the correct addresses of the share applicants and notices u/s 133(6) of the Act were duly served and were duly responded by the shareholders. The share applicants proved the source of investment and even source of source was proved with documentary evidences. The AO also issued summons to the directors of the assessee company and in compliance with the said summon Shri Arvind Agarwal, the director of the assessee company personally appeared and deposed on oath and also furnished the necessary documents which were required to be furnished in terms of summons issued u/s 131 of the Act. Despite that the AO was not convinced and satisfied with the explanation of the assessee and made the addition on the ground that the share premium charged by the applicant was bogus and the director of the assessee company has failed to produce the shareholders and justify the reasons for issuing shares at a high premium and thus made the addition of Rs. 11,07,50,000/- to the income of the assessee as unexplained cash credit u/s 68 of the Act.
7. Aggrieved assessee challenged the assessment order before the Ld. CIT(A) who after appreciating the facts on record and taking into account the submissions of the assessee directed the AO to delete the addition by discussing each and every share applicant at length in the appellate order. For the sake of ready reference the operative part is reproduced as under:
5. Observations, Findings and Decision
5.1 I have carefully considered the submissions made by the Ld. AR of the appellant and the findings recorded by the Ld. AO in the impugned order. I have also perused the documents furnished in the paper book on which the Ld. AR of the appellant relied in his submissions as also the decisions cited by him in support of the grounds taken in the appeal. From the facts on record it is noted that the original return of income filed by the appellant for AY 2008-09 was originally processed u/s 143(1) of the Act. The assessment of the appellant was thereafter reopened u/s 148 of the Act. In the reassessment proceedings the AO had verified the share application monies received by the appellant on test check basis. Being satisfied with the material available on record, the AO framed the assessment u/s 147/143(3) on 30.09.2011 at total income of Rs.31,270/-. In this reassessment order, no adverse inference was drawn against the share subscription monies received by the appellant during the relevant year. The Ld. Commissioner of Income-tax-2, Kolkata passed an order u/s 263 dated 10.03.2014 wherein the reassessment order dated 30.09.2011 passed by the AO was held to be erroneous and prejudicial to the interests of the Revenue for not making proper & sufficient enquiries into the share capital raised by the appellant during the relevant year. The Ld. CIT accordingly set aside the assessment to be framed de-novo with the following directions:
“(i) Examine the genuineness and sources of share capital, not on a test check basis, but in respect of each and every shareholder by conducting independent enquiry not through the assessee. The bank account for the entire period should be examined in the course of verification to find out the money trail of the share capital.
(ii) Further, the AO should examine the directors as well as examine the circumstances which necessitated the change in directorship if applicable. He should examine them on oath to verify their credentials as director and reach a logical conclusion regarding the controlling
(iii) the AO is directed to examine the source of realization from the liquidation of assets shown in the balance sheet after the change of Directors, if any. ”)
5.2 From the assessment order, I find that the Ld. AO had conducted enquiries in accordance with the directions issued by the Ld. CIT. The AO had made independent enquiries from each and every shareholder under Section 133(6) of the Act The bank statements of the appellant were also called for and the corresponding bank statements of share subscribers were also verified. It is noted that the Ld. AO had also undertaken verification of money trail and therefore requisitioned the source of source of funds from the shareholders, which was also furnished by them. The Director of the appellant was also examined on oath u/s 131 of the Act and his credentials were verified. Further, since none of the assets of the appellant were liquidated during the relevant year, the last direction issued by the Ld. CIT was rendered inapplicable in the given facts of the present case.
5.3 I find that the AO has not disputed the fact that each of the share subscribers had submitted the documentary evidences in support of the share subscription amounts received by them, in the course of independent enquiries conducted u/s 133(6) of the Act. It is also not the AO’s case that the assessee had failed to furnish any documents in support of the subscription amounts received from the fifteen corporate entities. In order to verify the genuineness of the assessee ’s share transactions; summons u/s 131 of the Act were issued to the Director of the appellant. According to AO, although the Director of the appellant attended the summons and he was deposed under oath but he failed to produce the Directors of the share subscribing entities. The AO therefore held that the high premium charged by the assessee from the shareholders remained unexplained, for which he assessed the entire share capital of Rs.11,07,50,000/- raised by the appellant during the FY 2008-09 by way of its unexplained cash credit u/s 68 of the Act.
5.4 On the above facts therefore the question is whether the addition u/s 68 made in the impugned order was validly made. It is noted that the issue with regard to addition u/s 68 in respect of share subscription amounts received has engaged attention of judicial authorities for quite some time. The jurisdictional High Court as also various Other High Courts have taken a consistent view that where a company has received subscription to its share capital then the primary onus is on the assessee to prove the identity and creditworthiness of the share subscribers and also prove the genuineness of the transactions. The Courts have further held that once the assessee proves the identity of the subscriber and the assessee also proves that there was genuine issuance of shares as per the provisions of the Companies Act, 1956 then the assessee is not required to prove anything more.
5.5 In the appellant’s case it is noted that all fifteen share subscribers in respect of whom addition u/s 68 was made were corporate assesses. The assessee had furnished the complete corporate information regarding these fifteen share subscribers. Based on the information gathered from the appellant, the AO made independent enquiries u/s 133(6) from each and every shareholder. On perusal of the contents of the notice issued u/s 133(6) to these fifteen shareholders, it is noted that the AO had called for the following information / details to verify their identity, creditworthiness and the genuineness of the transactions.
