Section 68 Inapplicable if no Cash Transactions & no sum of money credited in books 

ITO Vs Natraj Mercantile Pvt Ltd (ITAT Kolkata)

The Income Tax Appellate Tribunal (ITAT) Kolkata heard the appeal in the case of ITO vs. Natraj Mercantile Pvt Ltd regarding the applicability of Section 68 of the Income Tax Act to cash transactions. This article provides an overview of the case and its implications.

Background of the Case: The case involves an appeal filed by the revenue against the order of the Ld. CIT(A)-7, Kolkata. The dispute revolves around the applicability of Section 68 of the Income Tax Act to certain transactions.

Revenue’s Grounds: The revenue raised several grounds in the appeal, primarily related to the addition of Rs. 7,99,86,000 made by the Assessing Officer (AO) on account of share capital and premium. The key issue was the lack of identity of the creditors, genuineness, and creditworthiness of the transactions.

Assessing Officer’s Position: The Assessing Officer noted that the assessee received share capital and premium of Rs. 7,99,86,000 during the relevant assessment year. To verify the authenticity of these transactions and the identity and creditworthiness of the share subscribers, the AO requested the directors of the subscriber companies to appear before them with relevant documents. However, none of them appeared.

Lack of Compliance: The AO also issued a show-cause letter to the Managing Director of the assessee, highlighting the non-compliance from the assessee’s end and the failure to verify the identity and creditworthiness of the share subscribers.

AO’s Addition: Due to the lack of compliance and verification, the AO added the sum of Rs. 7,99,86,000 to the total income of the assessee under Section 68 of the Income Tax Act. This section deals with unexplained cash credits.

Ld. CIT(A)’s Decision: The Ld. CIT(A) considered the appeal and allowed it. The decision was based on the argument that the increase in share capital and premium did not involve cash transactions. Instead, the shares were issued through barter transactions, and therefore, Section 68 did not apply.

Lack of Verification: The Ld. CIT(A) made this determination primarily based on the written submissions of the assessee without detailed verification or examination of the factual claims made.

Appeal to ITAT: The revenue, dissatisfied with the decision, appealed to the Income Tax Appellate Tribunal (ITAT) Kolkata to contest the application of Section 68 in this case.

ITAT Ruling: The ITAT Kolkata reviewed the case but found no material to substantiate the claims made by the assessee and upheld by the Ld. CIT(A). The ITAT noted that the decision of the Ld. CIT(A) was based on written submissions without factual verification.

Result: The ITAT allowed the appeal of the revenue, effectively overturning the Ld. CIT(A)’s decision and upholding the addition made by the Assessing Officer.

Conclusion: The case of ITO vs. Natraj Mercantile Pvt Ltd underscores the importance of providing detailed and verifiable evidence when contesting tax assessments. In this instance, the reliance on written submissions without factual verification led to the reversal of the initial decision in favor of the assessee. It highlights the need for thorough documentation and substantiation of claims in tax-related matters.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This appeal filed by the revenue is against the order of Ld. CIT(A)-7, Kolkata vide Appeal No. 364/CIT(A)-7/Ward-6(3)/Kol/15-16 dated 21.09.2020 against the assessment order of ITO, Ward-6(3), Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 15.03.2015 for AY 2012-13.

2. Grounds raised by the revenue are reproduced as under:

“1. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in deleting the addition of Rs 7,99,86,000/- made by the A.O. on account of share capital and premium in the course of assessment in absence of identity of the creditors, genuineness and creditworthiness of the entire transactions.

2. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in deleting the addition of Rs 7,99,86,000/- made by the A.O. where no personal attendance was made by any director of the share allottee companies during the course of assessment proceedings and as such identity & creditworthiness of the creditors and genuineness of the transactions could not be verified.

3. The principles which has been laid down by the Hon’ble Supreme Court in the case of Pr. CIT'(Central) -1, Kolkata vs NRA Iron & Steel Pvt. Ltd. (412 ITR 161) suggests that “the assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the Assessee”. In the facts and under the circumstances of the case, the assessee company has failed to do so other than submission of mere statements of various kinds. Thus, the decision of the Ld. CIT(A) is erroneous in holding that the raised share capital was not the assessee’s own income.

4. The principles which has been laid down by the Hon’ble Supreme Court in the case of Pr. CIT(Central) -1, Kolkata vs NRA Iron & Steel Pvt. Ltd. (412 ITR 161) also suggests that the Assessing Officer is duty bound to investigate the creditworthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. In the facts of the case, in spite of best efforts made by the assessing officer, he could not verify the same as there was no response from the companies to whom shares were allotted on private placement basis. Thus, the decision of the Ld. CIT(A) is erroneous in holding that the raised share capital was not the assessee’s own income.

5. The principles which has been laid down by the Hon’ble Supreme Court in the case of Pr. CIT (Central) -1, Kolkata vs NRA Iron & Steel Pvt. Ltd. (412 ITR 161) also suggests that if the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act. In the facts of the case, the Ld. CITCA) completely ignored this aspect, thus he has erred in giving relief to the assessee.

6. On the facts of the present case, clearly the Assessee Company failed to discharge the onus required under Section 68 of the Act, the Assessing Officer was justified in adding back the amounts to the income of the assessee and the Ld. CIT(A) has erred in allowing relief to the assessee.

7. In absence of verification, Ld. CIT(A) should have remanded the matter to AO for fresh verification. Thus, he has violated the provisions of Rule 46A of the I.T. Rules.”

3. In the present case none represented the assessee before us. Department was represented by Shri S. Datta, CIT, DR.

4. On the earlier occasion when the matter was listed for hearing on 21.06.2023, 17.05.2023 and 15.05.2023, none appeared on behalf of the assessee and the matter was adjourned, directing the registry to issue notice through Ld. DR as well as inform the assessee over telephone. From the order sheet entry of 21.02.2023, we observe that though the notices have been served, yet no one has come up to represent the matter before us on behalf of the assessee. Thus, we find no other alternative but to adjudicate the appeal ex parte qua the assessee by the assistance of Ld. CIT DR

5. Brief facts of the case are that assessee filed its return on 17.03.2013 reporting total income of Rs.20,130/-. Case was selected for scrutiny through CASS for which statutory notices were issued and served on the assessee. In the course of assessment proceedings, ld. AO noted that assessee has received share capital and premium thereon amounting to Rs.7,99,86,000/- during the year under consideration. To verify the genuineness of the said transactions and to verify the identity and creditworthiness of the share subscribers, Ld. AO asked the assessee to produce the directors of all the share subscribers to whom shares were allotted during the year under consideration. They were also asked to appear personally before the Ld. AO to produce details/documents in support of the justification for the investment made by them in the assessee and other details as asked for. But none of them appeared before the Ld. AO. Thereafter, Ld. AO issued show cause letter to the Managing Director of the assessee on 05.03.2015 informing the said facts and asked to explain as to why the credit claimed to the tune of Rs.7,99,86,000/- should not be added back to the total income of the assessee u/s. 68 of the Act as the credit in the books of accounts remained unexplained and identity and creditworthiness of the share subscribers and the genuineness of the transactions could not be verified.

5.1. According to Ld. AO, assessee ought to have complied with the notices/letters issued to explain the sources from which the share subscription was made. According to Ld. AO, in this case there was no compliance either from the end of the assessee or from the end of alleged subscriber companies. Therefore, Ld. AO found that the identity and creditworthiness of the share subscribers and the genuineness of the transactions were not satisfactorily explained and thus, made the addition to the total income u/s. 68 of the Act. Aggrieved, assessee went in appeal before the Ld. CIT(A) who after considering the facts of the case, findings given by the ld. AO and several judicial precedents, allowed the appeal of the assessee.

Aggrieved, revenue is now in appeal before the ITAT.

6. Before us nothing has been placed on record in support of the claim of the assessee to substantiate and demonstrate the identity and creditworthiness of the share subscribers and the genuineness of the transactions in respect of share capital raised by the assessee including share premium amounting to Rs.7,99,86,000/-.

6.1. From the perusal of order sheet dated 21.06.2023, it is noted that Registry was directed to issue notice through Ld. DR as well as e-mail. Also a report from the Ld. AO was awaited. Thus, in the interest of natural justice, another opportunity was granted fixing the date of hearing on 13.07.2023. In respect of a report from the Ld. AO, an e-mail communication along with supporting documents is placed on record by the Ld. Sr. DR. In the e-mail dated 07.06.2023 from ITO, Ward-6(1), Kolkata it is stated that Departmental Notice Server was deputed to serve the notice but he failed to serve the same with the remark, “due to not found the assessee company”. It is also mentioned that notice was sent by e-mail on the address shankarharlalka@gmail.com. The address contained in this notice is C/o Agarwal Vishwanath & Associates, 133/1/1A, S. N. Banerjee Road, 3^rd floor, Kolkata-700013. It is also noted from the perusal of records that assessee had moved an application dated 03.03.2022 to inform change of communication address. The new address informed by the assessee through this communication is the one as noted above. Subsequent to this application, notices have been issued on the new address which have not been returned as unserved.

7. Before the Ld. CIT(A), assessee had contended that impugned increase in share capital along with premium in the present case is not a cash transaction. Assessee had purchased investments from various parties and in consideration to which assessee had issued shares at premium. Thus, there is no involvement of any cash and no sum of money is credited in the books of account maintained by the assessee. Accordingly, provisions of section 68 are not applicable. After considering the submissions made by the assessee, Ld. CIT(A) allowed the appeal of the assessee by deleting the addition of Rs.7,99,86,000/- by observing that authorised representative has drawn his attention to the fact that transfer of the impugned shares were not based on any cash transaction but by way of barter transaction as illustrated in the written submission.

7.1. The observations and findings given by the Ld. CIT(A) to this effect is reproduced as under:

“4.2. I have considered the submission of the AR of the appellant in the backdrop of the assessment order. I have also considered the materials on record in deciding the issue at hand. The brief facts’ of the case are that share capital introduced in the account of the appellant during the year under consideration amounting to Rs.7.99,86,000/- by the list of share subscribers were treated as unexplained cash credit by the AO u/s 68 of the Act. The reasons for this was because (a) none of the directors of the subscriber companies appeared before the AO u/s 131 of the Act with the required details/documents and (b) the assessee could not offer any explanation as to why the said share application money should not be treated as bogus and unexplained cash credit in its books as per the provisions of section 68 of the Act Reliance was placed on various case laws to justify his action (supra). On the other hand, the AR has drawn my attention to the fact that the transfer of the impugned shares were not based on any cash transactions but by way of barter transactions as elucidated in the written  submission (supra), Since this is a case of cashless transaction, section 68 of the Act cannot be applied in any manner which the AO failed to comprehend. The provisions of section 68 of the Act refers to cash credit in the accounts of an assessee which is not explained or remains unexplained before the concerned AO. The instant case is not on this ground in as much as there was no cash credit but only book adjustments. The case of the appellant is well covered by various judicial decisions in its favour as mentioned in the submission of the AR (supra). Thus in view of the foregoing, the AO is directed to delete the impugned amount of Rs.7,99,86,000/- added u/s. 68 of the Act. This ground is allowed.”

8. Before us nothing is placed on record to demonstrate the claim made by the assessee and upheld by the Ld. CIT(A). Further, it is noted that Ld. CIT(A) has arrived at a conclusion merely on the basis of written submission made in the course of first appeal before him without any verification and examination of the facts claimed by the assessee. There is nothing in the order of Ld. CIT(A) from where it is discernible as to how assessee had made investments in various parties and to whom the shares have been issued at premium. Merely by placing reliance on certain judicial precedents, conclusion has been drawn without reference to any factual observation with corroborative evidences. There is no material even before us which would enable us to verify the claim of the assessee so as to uphold the finding given by the Ld. CIT(A). After considering the observations and findings given by the authorities below, we set aside the order of the Ld. CIT(A) and do not find any reason to interfere in the order passed by the Ld. AO and accordingly, uphold the addition so made by the Ld. AO in this regard.

9. In the result, appeal of the revenue is allowed.

Order pronounced in the open Court on 22ⁿd August, 2023.