DCIT Vs Nishit Capinvest Pvt Ltd (ITAT Delhi)
Introduction: In a significant ruling on January 4, 2024, the Income Tax Appellate Tribunal (ITAT) Delhi in the case of DCIT Vs Nishit Capinvest Pvt Ltd, addressed the contentious issue of the legitimacy of the source of income derived from transactions in penny stocks. The Revenue challenged the Commissioner of Income Tax (Appeals)-26, New Delhi’s decision, which favored the assessee, Nishit Capinvest Pvt Ltd, a company engaged in investment business, for the assessment year 2016-17.
Detailed Analysis
The crux of the Revenue’s appeal was the addition of Rs.42,85,60,000/- to the assessee’s income under Section 68 of the Income Tax Act, 1961, on the grounds of unexplained share capital and premium. The Assessing Officer (AO) had scrutinized the assessee’s transactions, particularly focusing on the source of the funds received as share premium from certain individuals associated with the company, suspecting them to be involved in transactions with penny stock companies.
The AO’s suspicion was primarily based on the premise that the funds from the sale of shares of Shilpi Cables Technologies Ltd (SCTL), characterized as penny stocks, were used to subscribe to the share capital and premium of Nishit Capinvest Pvt Ltd. The AO inferred that the transactions were orchestrated to circulate money within the Gupta family (associated with the assessee) and concluded the funds as unexplained under Section 68 of the Act.
However, the First Appellate Authority (FAA) delved into the details, examining the bank statements and financials of the investors, and found no substantial evidence to support the AO’s inference. Importantly, the FAA observed that for two of the investors, no additions were made in their hands in their respective assessments regarding the sale of SCTL shares. Furthermore, for one investor where an addition was initially made, it was later deleted by the CIT(A), and this decision was upheld by the ITAT Delhi in a separate case.
The ITAT Delhi, in affirming the FAA’s decision, highlighted that mere control or association with companies transacting in penny stocks is insufficient to question the source of funds used in legitimate share subscriptions. The Tribunal emphasized that without direct or circumstantial evidence linking the assessee’s funds to alleged tax evasion schemes, the addition under Section 68 was unjustifiable.
Conclusion: The ITAT Delhi’s ruling in DCIT Vs Nishit Capinvest Pvt Ltd reinforces the principle that tax authorities must base their inquiries and additions on concrete evidence rather than mere suspicions or associations. The decision underscores the need for a thorough examination of the source of funds and the legitimacy of transactions, especially in cases involving investments and share premiums. By setting aside the AO’s addition, the ITAT has provided clarity on the scrutiny of investments involving penny stocks, ensuring that legitimate business transactions are not unduly penalized based on associative inferences. This judgment serves as a significant reference for similar cases, highlighting the importance of evidence-based assessments in tax matters.
FULL TEXT OF THE ORDER OF ITAT DELHI
The Revenue has come in appeal against the order dated 08.02.2023, for the assessment year 2016-17, passed by the Commissioner of Income Tax (Appeals)-26, New Delhi (hereinafter referred as “learned First Appellate Authority” or in short “FAA”), in appeal no. 10227/2018-19, arising out of assessment order dated 29.12.2018 u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred as the “Act”), passed by the ACIT, Circle-18(2), New Delhi, hereinafter referred to as the “AO”).
2. The facts in brief are the assessee in this case is a closely held company, engaged in the business of making investments. During the instant year it has raised share capital from Directors of the assessee company and their relatives when it issued 3896000 Equity shares to them for a total consideration of Rs.42,85,00,000/- which consisted of share capital amounting to Rs.3,89,60,000/- and share premium of Rs. 38,96,00,000/-. The Equity shares were allotted at a share price of Rs.110/- per share including an amount of Rs.100/- per share as share premium. The shares were issued as per the valuation certificate obtained under Rule 11UA as on 31st March 2015, according to which the book value of each share was certified at Rs.110/- per share. The assessee company had furnished a return of income declaring a net taxable income of Rs.36,82,070/-. The case was picked up for Limited Scrutiny to verify “whether the funds received in the form of share premium are from disclosed sources and have been correctly offered to tax”. During the course of assessment proceedings, it was explained to the Assessing Officer that share premium was received from existing shareholder Shri Dinesh Gupta (HUF), his HUF Dinesh Gupta (HUF), HUF of the existing shareholder Shri Rajesh Gupta and also from wife of Shri Rajesh Gupta namely Smt. Renu Gupta. The entire share premium was received by account payee cheques and all the share applicants were duly assessed to income The copies of their confirmations along with copies of their bank accounts from where the share premium was received as also the source of credit in their bank account immediately preceding the payment to the assessee company were also explained along with documentary evidences. Assessee thus claimed that the assessee in this manner proved the nature and source of the amount credited in its bank account by way of share premium has also explained the nature and source of the funds available in the hands of the shareholders which enabled them to make the investment in the assessee company. That in this manner the assessee company duly discharged the onus that lay upon it u/s 68 of the Act to explain the nature and source of credit in its books of accounts and bank account and the shareholder also discharged the onus to explain the nature and source of the sum invested by them in the assessee company. However, the learned Assessing Officer has rejected the explanation so furnished and has held that the amount of Rs.42,85,00,000/- received by the assessee company is unexplained and has made addition of this amount as income u/s 68 of the Act.
3. Before learned CIT(A), on behalf of the assessee, relevant evidences were filed about the identity of the investors. Evidence was also filed with regard to source of funds available in the hands of investors and being satisfied, the learned CIT(A) considered the genuineness of transactions and investment explained. It will be appropriate to reproduce the relevant findings of learned CIT(A) in para 4 of the impugned order as follows:
“4. Ground No.-1 to 4: These grounds are raised by the appellant w.r.t. the addition of Rs.42,85,60,000/- on account of investment by the promoter shareholders in the company which was held as unexplained. The appellant has submitted that the AO has erred in making addition of Rs. 42,85,60,000/- u/s 68 of the Act and that the entire share capital was raised during the instant year from the existing shareholders are closely related family members who are also promoters of the assessee company which are fully explained in the hands of shareholders as well as the assessee company. The assessee further submitted that the addition was made only on the basis of suspicion and the shareholders of the assessee company have duly confirmed the transaction with the assessee company and have also explained the nature and source of the investment made by them in the assessee company.
As per the assessment order dated 29.12.2018, the instant case was selected for limited scrutiny by CASS: “Whether the funds received in the form of share premium are from disclosed sources and have been correctly offered for tax”. The assessee was asked to submit explanations and evidences regarding the aforesaid single limited scrutiny point by the AO. It was found by him that during the instant year the assessee company issued 38,96,000 equity shares of face value of Rs. 10/- per share at a premium of Rs. 100/- per share. In this manner the assessee company received share premium of Rs. 38,96,00,000/- along with share capital of Rs. 3,89,60,000/- from four persons as per details here under:
