Addition u/s 68 was justified as assessee’s failed to establish genuineness of transaction with cogent and credible evidence

PCIT (Central) -2 Vs BST Infratech Limited (Calcutta High Court)

Conclusion: Assessee had miserably failed to establish genuineness of the transaction by cogent and credible evidence and that the investments made in its share capital were genuine. Therefore, assessee had failed to discharge legal obligation to prove the genuineness of the transaction and the credit worthiness of the investor which had shown to be so by a “round tripping” of funds. Therefore, addition under section 68 was justified.

Held: AO stated that there was rampant practice of introducing undisclosed income in the guise of share application/ share allotment to different companies/ individuals; the companies took the shelter of corporate veil to channelize the undisclosed income; to protect this practice the Income Tax Act was amended with effect from 01.04.2012. AO referred to a letter which was served on assessee requesting them to produce the new share-holders as well as the Directors before AO within 15 days to prove the genuineness, credit-worthiness of their investment. Under such circumstances the entire share application/ allotment money was added back under Section 68  as undisclosed cash credit. CIT(A) after taking note of the various decisions noted that the onus of establishing the identity, creditworthiness and genuineness of the share transaction was not discharged by assessee. Tribunal confirmed the decision of CIT(A). It was held that the return of income filed by assessee’s shareholders showed that they did not have any real business activity and had never earned taxable income yet they were dealing in crores of money in the name of investing and receiving funds towards share capital at unreasonably high premium. Further the bank accounts showed that they were being used only to rotate money and never had any substantial balance left either before or after transaction. The modus adopted was discussed by observing that once an amount through cheque or RTGS was received from one entity, it would immediately be diverted to another entity and the resultant cash balance was only a paltry sum of few thousands of rupees. Therefore, the CIT(A) came to the conclusion that the transactions were not genuine. CIT(A) was right in adopting a logical process of reasoning considering the totality of the facts and circumstances surrounding the allegations made against  assessee taking note of the minimum and proximate facts and circumstances surrounding the events on which charges were founded so as to reach a reasonable conclusion and rightly applied the test that a reasonable/prudent man would apply to arrive at a conclusion. On facts, assessee had not established the capacity of the investors to advance moneys for purchase of above shares at a high premium. The credit worthiness of those investors companies was questionable and the explanation offered by assessee, at any stretch of imagination could not be construed to be a satisfactory explanation of the nature of the source. Assessee had miserably failed to establish genuineness of the transaction by cogent and credible evidence and that the investments made in its share capital were genuine. Therefore, assessee had failed to discharge legal obligation to prove the genuineness of the transaction and the credit worthiness of the investor which had shown to be so by a “round tripping” of funds. For all the above reasons, the revenue succeeded.

FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT

This appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 (the Act) is directed against the order dated 30.11.2022 passed by the Income Tax Appellate Tribunal “A” Bench, Kolkata (Tribunal) in ITA NO. 2655/Kol/2019 for the Assessment Year 2012-13. The revenue has raised following substantial questions of law for consideration:

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