Facts of the Case

The present appeal pertains to Assessment Year 2007–08, wherein the Revenue challenged the order of the Income Tax Appellate Tribunal dated 14.01.2019.

The dispute revolved around two key issues:

  1. Addition under Section 68 of the Income Tax Act, 1961 concerning share capital investment of ₹20 crores received by the assessee at a premium of ₹190 per share.
  2. Inclusion of CENVAT credit in profits for the purpose of claiming deduction under Section 80IB.

The Assessing Officer (AO) treated the share capital as unexplained income due to doubts regarding the source of funds of the investor company.

Issues Involved

  1. Whether the deletion of addition under Section 68 by the Tribunal was justified where share capital was received at a high premium.
  2. Whether CENVAT credit qualifies as profit “derived from” an industrial undertaking under Section 80IB for deduction purposes.

Petitioner’s (Revenue’s) Arguments

  • The investor company had negligible balance before making the investment, raising suspicion about the genuineness of funds.
  • The sudden inflow and subsequent investment indicated unexplained income routed through banking channels.
  • High share premium lacked justification and indicated accommodation entries.
  • CENVAT credit cannot be treated as income derived from an industrial undertaking.
  • Reliance placed on Liberty India vs. Commissioner of Income Tax (2009) to argue restrictive interpretation of “derived from”.

Respondent’s (Assessee’s) Arguments

  • The assessee satisfied the triple test under Section 68:
    • Identity of investor – established
    • Creditworthiness – investor had net worth exceeding ₹100 crores
    • Genuineness – transactions conducted through banking channels
  • Share valuation was supported by a Chartered Accountant using Net Asset Value Method (NAV).
  • AO failed to conduct proper inquiry despite availability of sufficient evidence.
  • CENVAT credit is intrinsically linked to manufacturing activity and hence eligible under Section 80IB.

Court’s Findings / Order

On Section 68 Issue

  • The Court emphasized the triple test (identity, creditworthiness, genuineness).
  • Identity and transaction genuineness were undisputed.
  • Investor’s net worth confirmed creditworthiness.
  • AO focused incorrectly on high share premium, which is not a valid ground under Section 68.
  • Reliance placed on CIT vs. Anshika Consultants (P.) Ltd..
  • Held: No substantial question of law arises.

On Section 80IB Issue

  • Distinguished between CENVAT credit and export incentives like DEPB.
  • CENVAT credit is directly related to manufacturing operations.
  • Relied on CIT vs. Dharam Pal Prem Chand Ltd..
  • Supreme Court dismissal of SLP reinforced the legal position.
  • Held: Deduction under Section 80IB rightly allowed.

Final Order

  • Appeal dismissed.
  • Tribunal’s order upheld.
  • No substantial question of law found.

Important Clarification

  • High share premium alone cannot justify addition under Section 68.
  • AO must conduct proper inquiry if doubts exist.
  • CENVAT credit qualifies for deduction under Section 80IB, being directly linked to manufacturing activity.
  • Distinction between manufacturing-linked benefits vs. export incentives is crucial.

Sections Involved

  • Section 68 – Unexplained cash credits
  • Section 80IB – Deduction for profits from industrial undertakings

 Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS27092023ITA7342019_130428.pdf

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