Facts of the Case

The assessee, Prayag Capitals India Limited, filed its return of income for Assessment Year 2015-16 declaring total income of ₹11,10,050. The assessment was completed under Section 143(3) of the Income Tax Act vide order dated 20.12.2017, assessing total income at ₹1,82,90,050.

During assessment proceedings, the Assessing Officer treated an increase in share capital amounting to ₹1,71,80,000 as unexplained income under Section 68. Out of this, ₹70,00,000 was received from M/s Sakshi Barter Pvt. Ltd. and the balance ₹1,01,80,000 was received from various other shareholders. The Assessing Officer held that the assessee failed to establish identity, creditworthiness, and genuineness of the share capital contributions.

On appeal, the Commissioner of Income Tax (Appeals) partly allowed the appeal by deleting ₹45,00,000 but confirmed additions of ₹70,00,000 and ₹56,80,000. Aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal.

 Issues Involved

  1. Whether the share capital received by the assessee could be treated as unexplained cash credit under Section 68.
  2. Whether the assessee had satisfactorily established identity, creditworthiness, and genuineness of the shareholders.
  3. Whether group company transactions routed through banking channels could be treated as accommodation entries or shell company transactions.

 Petitioner’s (Assessee’s) Arguments

The assessee contended that M/s Sakshi Barter Pvt. Ltd. and other contributing entities were group companies and regular income-tax assessees. It was submitted that detailed documentary evidence was furnished, including PAN details, income-tax returns, audited financial statements, bank statements, share application forms, and confirmations.

It was further argued that the funds received by M/s Sakshi Barter Pvt. Ltd. were routed through another group entity, M/s Infraplus India Pvt. Ltd., through a series of genuine banking transactions over a period of time. The assessee asserted that all three ingredients required under Section 68—identity, creditworthiness, and genuineness—were fully established.

 Respondent’s (Revenue’s) Arguments

The Revenue contended that M/s Sakshi Barter Pvt. Ltd. did not have sufficient independent financial capacity and merely routing funds through bank accounts did not establish genuineness. It was argued that the transactions bore the characteristics of accommodation entries and that the Assessing Officer and the CIT(A) were justified in sustaining the additions.

 Court Order / Findings

The ITAT, after examining the voluminous documentary evidence and submissions of both parties, held that the assessee had successfully established the identity of the shareholders, their creditworthiness, and the genuineness of the transactions.

The Tribunal observed that M/s Sakshi Barter Pvt. Ltd. and other contributing entities were registered companies and regular income-tax assessees. The accumulation of funds by group entities through regular business transactions was adequately explained. The Tribunal further held that there was no material on record to establish that the transactions were sham or carried out with any mala fide intention.

Accordingly, the ITAT directed deletion of the addition of ₹70,00,000 as well as the addition of ₹56,80,000. The appeal of the assessee was allowed in full.

 Important Clarification / Legal Principle

For making an addition under Section 68, the Assessing Officer must establish failure on the part of the assessee to prove identity, creditworthiness, and genuineness of the transaction. Where these three ingredients are duly supported by documentary evidence, mere suspicion or allegation of shell companies is insufficient to sustain additions. Group company transactions routed through banking channels cannot be treated as unexplained income without cogent adverse material.

Link to download the order -  https://www.mytaxexpert.co.in/uploads/1770872478_PRAYAGCAPITALSINDIALIMITEDALLAHABADVS.ITOWARD22NOWWARD21ALLAHABAD.pdf  

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