Issue of Share at Premium: ITAT Deletes Rs. 57.5 Crore Addition

ITO Vs Umang Trading Pvt. Ltd. (ITAT Kolkata)

The case of Income Tax Officer (ITO) vs. Umang Trading Pvt. Ltd., adjudicated by the Income Tax Appellate Tribunal (ITAT) in Kolkata, revolves around the issue of share capital raised by Umang Trading Pvt. Ltd. and the subsequent addition of Rs. 57.5 crore by the Assessing Officer (AO) under Section 68 of the Income Tax Act. The primary contention was whether the share capital raised by Umang Trading Pvt. Ltd., including a substantial share premium, was genuine or merely an attempt by the company to launder its own money through a complex layering of investments.

Case Background:

1. Share Capital and Premium Raised:
   • Umang Trading Pvt. Ltd., a non-banking finance company registered with the Reserve Bank of India, raised share capital by issuing equity shares with a face value of Rs. 10 each at a premium of Rs. 23 each.
   • The total amount raised was Rs. 57,54,54,000, which included Rs. 17,43,00,080 towards share capital and Rs. 40,10,74,000 as share premium.
2. Assessment by AO:
   • The AO scrutinized the transaction and added the entire amount raised to the income of the assessee under Section 68 of the Income Tax Act.
   • The AO’s rationale was that Umang Trading Pvt. Ltd. had ploughed back its own money through the layering of investments, implying that the transactions were not genuine.
3. Evidence Submitted:
   • Umang Trading Pvt. Ltd. provided extensive documentation to support the legitimacy of the share capital raised. This included names and addresses of the investors, PAN details, confirmations, copies of Income Tax Returns (ITRs), annual audited accounts, and bank statements.
   • Additionally, replies to summons issued under Section 133(6) of the Act were also furnished, confirming the investments made.

Appellate Proceedings:

1. CIT(A) Review:
   • The Commissioner of Income Tax (Appeals) [CIT(A)] observed that the AO had not adequately considered all relevant evidence.
   • Consequently, the CIT(A) requested a remand report from the AO, which was submitted on April 26, 2019.
2. Findings from Remand Report:
   • The remand report indicated that the AO had conducted verification by obtaining necessary evidence and issuing summons under Section 131 to both the assessee and the subscribing companies.
   • The directors of Umang Trading Pvt. Ltd. and the subscribing companies appeared before the AO and their statements were recorded, explaining the sources of the funds invested.
3. CIT(A)’s Decision:
   • After reviewing the remand report, the CIT(A) concluded that the identity of the share subscribers was not in doubt.
   • The AO’s primary concern had been the genuineness of the transactions and the creditworthiness of the subscribers. However, the remand proceedings did not reveal any doubts regarding these aspects.
   • The CIT(A) noted that the subscribers had confirmed their investments and explained the source of funds. Given the detailed verification process and compliance by the subscribers, the CIT(A) deleted the addition made by the AO.

ITAT’s Judgment:

1. Analysis and Decision:
   • The ITAT reviewed the facts, the remand report, and the appellate order. It noted that Umang Trading Pvt. Ltd. had successfully demonstrated compliance with the requirements of Section 68.
   • The subscribers had responded to notices and appeared before the AO, affirming their investments and explaining their fund sources.
   • The ITAT acknowledged that the CIT(A) had thoroughly discussed the facts concerning each subscriber and had addressed the issue of fund sources in detail.
2. Conclusion:
   • The ITAT found no infirmity in the order of the CIT(A), which was well-reasoned and adequately addressed the concerns raised by the AO.
   • As a result, the ITAT upheld the order of the CIT(A), dismissing the revenue’s appeal.

Outcome: The ITAT’s order, pronounced in open court on April 12, 2024, dismissed the appeal by the revenue, thereby confirming the deletion of the Rs. 57.5 crore addition made by the AO. This decision reinforced the importance of thorough verification and due diligence in assessing the genuineness of share capital transactions and the compliance with Section 68 requirements.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

The present appeal filed by the revenue is against the order of Ld. CIT(A)-1, Kolkata dated 09.05.2019 for AY 2015-16.

2. The grounds raised by the revenue are as under:

“That on the facts and circumstance of the case and on Law Ld. CIT(A) has erred in granting relief to the assessee on account of unexplained cash credit added as per provision of section 68 of the I. T. Act of Rs. 57,54,54,000/- without considering the facts that the credit worthiness of the share subscribing companies to invest in shares in the assessee company was no proved satisfactorily, and thereby the genuineness of the transactions also remained unsubstantiated, during the Remand proceedings.

2. That on the facts and circumstance of the case and on Law Ld. CIT(A) has erred in granting relief to the assessee without discharging onus in his role “Co-terminus & Coextensive” with that of an AO while the AO did not record satisfaction about the credit worthiness and consequently genuineness of the transactions of the two share subscribing companies during the remand proceedings.”

3. The issue raised in this appeal is against the deletion of addition of Rs.57,54,54,000/-by Ld. CIT(A) as made by the AO u/s. 68 of the Act in respect of share capital and share premium being unexplained cash credits in the books of the assessee during the year.

4. The facts in brief are that the assessee filed its return of income on 31.10.2015 declaring total income at Rs.10,26,215/-. The assessee is a registered NBFC with code no. 0807 and is duly registered with the Reserve Bank of India. The case of the assessee was selected for limited scrutiny under CASS for the reason namely (i) introduction of capital in NBFC/Investment companies, (ii) substantial increase in share capital in a year and (iii) Large share premium received during the year. The statutory notices were duly issued and served upon the assessee. The AO found from the Balance Sheet as at 31.03.2015 that the assessee company has received share application money of Rs.57,54,54,000/- during the year in question by issuing 1,74,38,000 equity shares of Rs. 10/- each at a premium of Rs.23/- each thereby raising total amount of rs.57,54,54,000/- as share application money during the year. The AO extracted the details of these two shareholders i.e. (i) L7 Vintrade Private Limited and (ii) rocket Infrastructure Private Limited at para 2.2 of the assessment order. The AO issued notices u/s. 133(6) of the Act dated 06.09.2017 to the subscribing companies for verification of these transactions. Besides, AO also calledupon the assessee to justify the premium received from these companies. The share subscribing companies duly replied to the notices issued u/s. 133(6) of the Act before the AO and the AO ,on the basis of the replies, came to the conclusion that these companies were lacking business fundamental and credentials in the form of accumulated profits or past history of the promoters to subscribe the shares of this magnitude in the assessee company. It was also noted that these share subscribing companies have raised their share capital and unsecured loans during FY 2014-15 and invested out of that money in the assessee company. The AO also noted in the assessment order that assessee has routed its own money through these companies having the same management and further that these subscribing companies were finance and investment companies. The AO noted that these companies have taken money in the form of loans and share capital and passed it on to other companies by layering of transactions. The AO also observed that the said fact was confronted to the assessee company during the proceeding, however, no plausible explanation was given by the assessee company. Finally, the AO after relying on Sumati Dayal Vs. CIT 214 ITR 901 (SC) and CIT Vs. Durga Prasad More , 82 ITR 540 (SC) came to the conclusion that these subscribing companies did not have any creditworthiness to invest in the said assessee company and assessee’s own undisclosed funds were ploughed back in the guise of share capital/share premium. With this background , the same was added as unexplained cash credit u/s. 68 of the Act to the income of the assessee in the hands of the assessee in the assessment framed u/s. 143(3) of the Act dated 31.12.2017.

5. In the appellate proceeding, the Ld. CIT(A) allowed the appeal of the assessee after taking into account the submissions of the assessee, remand report called from the AO and reply to the remand report filed the assessee by observing and holding as under:

6. The Ld DR submitted before the bench that the order passed by Ld. CIT(A) is against the facts on records and findings recorded by the AO in the assessment order as well as in the remand report. The Ld. DR submitted that the assessee has raised money from two companies who have literally no creditworthiness to subscribe to the share capital/share premium of the assessee company and, therefore, the genuineness of the transactions were undoubted. Ld. DR stated that the money raised in the form of share subscription is nothing but assessee’s own fund which was ploughed back in the guise of share capital/share premium of Rs.57,54,54,000/- comprising of Rs.17,43,18,000/- as share capital and Rs.40,10,00,074/-. The Ld. DR further contended that though these companies were stated to be under the same management and findings to this effect have been recorded by Ld. CIT(A), but the facts remain that there was no commercial activity and creditworthiness of these investor companies. The ld. DR referred to the order of AO to prove that para 2.4 of the assessment order that there was no revenue operation and, therefore, these companies were nothing but conduit company raising capital and passing on to other companies. The Ld. DR argued that subscription of share in the capital of the assessee company was also a part of the same activities of the subscriber companies. The Ld. DR, therefore, prayed that the order of Ld. CIT(A) may be reversed and that of the AO may be restored.

7. The Ld. AR, per contra, strongly refuted the arguments of the Ld. DR and submitted that the assessee has filed all the documents/evidences before the AO as well as Ld. CIT(A). The Ld. AR stated that even the notices issued u/s. 133(6) of the Act to both the investors were duly responded and all the details called for were duly furnished. The Ld. AR, while referring to the observations of the AO that the offices were located in the same place, stated that since all the companies are under the same management and, therefore, the addresses of these companies were same and at the same place. The Ld. AR also referred to the remand proceedings and report furnished by the AO in which the AO has called for the various evidences and also recorded statements u/s. 131 of the Act of the assessee as well as of the subscriber companies and it was confirmed by the subscriber companies that they have invested in shares of assessee company. The Ld. AR also referred to the finding of facts recorded by Ld. CIT(A) by referring to the remand report that AO has not doubted the identity, creditworthiness of the investors and genuineness of the transactions but the AO has only stated in the remand report that the money advanced by these companies were raised by way of share capital and unsecured loans either in the preceding or in the current financial year. The Ld. AR also stated that the AO has only commented on the directors of the assessee company and that of the Rocket Infrastructure Pvt. Ltd. and observed that there was no possibility of two persons coming together and doing business together who were belonging to different communities and faith. Ld. AR further stated that the Ld. CIT(A) has passed a very cogent, convincing and speaking order while deleting the addition and, therefore, the same may kindly be upheld by dismissing the appeal of the revenue.

8. We have heard rival contentions and perused the material available on record including the appellate order passed by the ld CIT(A). We note that undisputedly the assessee has raised share capital from two investors by issuing equity shares of face value of Rs. 10/- each at a premium of Rs.23/- each. In aggregate, the assessee has raised Rs.57,54,54,000/- comprising Rs.17,43,00,080/- towards share capital and Rs.40,10,74,000/- as share premium. We also note that the assessee is a non banking finance company duly registered with the Reserve Bank of India under Code no. 0807 and is in the business of share trading and advancing of loans. We also note that the assessee has filed before the AO all the necessary evidences as desired/required by the AO comprising names and addresses, PANs, confirmations, copies of ITRs and annual audited accounts, copy of bank statements of the subscribers. Besides the AO was also furnished replies in response to summon u/s. 133(6) of the Act confirming the investments as having been made in the share capital of the assessee company. However, the AO added the amount by observing that assessee has ploughed back its own money through layering of investments and thus added the same u/s. 68 of the Act to the income of the assessee. In the appellate proceeding, Ld. CIT(A), after observing that AO has not considered certain evidences which were very relevant and cogent in order to decide the issue on hand correctly, called upon the AO to furnish a remand report on the said materials and accordingly, a remand report dated 26.04.2019 was filed through Addl. CIT, Range-1, Kolkata. The Ld. CIT(A) observed from perusal of the remand report that the AO has carried out verification by calling for the necessary evidences and issuing summons u/s. 131 to the assessee as well as to the subscribing companies. The directors of the assessee company as well as the subscriber companies had appeared before the AO and their statements were recorded u/s. 131 of the Act. In the statements recorded u/s. 131 of the Act, the sources were duly explained by the subscribers as noted by the Ld. CIT(A) in his findings extracted (supra). The Ld. CIT(A) finally held that there was no doubt as to identity of the share subscribers at the time of assessment and only doubt were with regard to genuineness of the transactions and creditworthiness of the share subscribers and in the remand report the AO did not indicate or raise any doubt about the genuineness of the transactions or creditworthiness of the subscribers and accordingly deleted the addition.

8.1. Having considered all the facts before us including the remand report and appellate order, we note that the assessee has proved all the ingredients of section 68 of the in the remand proceeding. We also note that the subscribers had also responded to the notices issued u/s 133(6) of the Act and also appeared before the AO in compliance of the summons issued u/s. 131 of the Act. We note that the subscribers have affirmedthese investments in the equity shares of the assessee company and even explained the source of the funds. The ld CIT(A) have discussed the facts in details qua each subscribers in the appellate order which has been extracted above recording a finding qua each subscribers about the source of funds and all the ingredients of 68 having satisfied as the AO has examined the issue in detail in remand proceedings by calling for information under section 133(6) of the Act and the subscribers also appearing before the AO in compliance to summons issued u/s 131 of the Act and statements of the directors of the subscribers companies having been recorded. We also note that these are group companies under the same management. Therefore, we do not find any infirmity in the order of Ld. CIT(A) who has passed a very reasoned and speaking order while deleting the addition. Consequently we are inclined to uphold the same by dismissing the appeal of the revenue.

10. In the result, the appeal of revenue is dismissed.

Order is pronounced in the open court on 12^th April, 2024