Facts of the Case

The assessee company received ₹1.51 crore as share capital/share premium from multiple companies during the relevant assessment year. The Assessing Officer (AO) alleged that these companies were shell entities controlled by an entry operator (Tarun Goyal) and engaged in providing accommodation entries.

The AO found:

  • All investor companies had a common address.
  • Directors were employees or dummy persons.
  • Transactions followed a layered money routing mechanism.
  • Shares of face value ₹10 were issued at a premium of ₹40 without justification.

Accordingly, the AO added the amount under Section 68 as unexplained cash credit.

Issues Involved

  1. Whether the share capital/share premium received by the assessee was genuine or merely accommodation entries?
  2. Whether the assessee had successfully discharged the burden of proof under Section 68?
  3. Whether ITAT was justified in deleting the addition made by the Assessing Officer?

 Petitioner’s (Revenue) Arguments

  • The investor companies were bogus shell entities created solely to provide accommodation entries.
  • Evidence from search operations showed:
    • Companies were controlled and operated by a single person.
    • No real business activity existed.
  • The assessee failed to:
    • Produce directors for examination.
    • Provide satisfactory explanation of high share premium.
  • Mere submission of documents like PAN, bank statements, etc., does not prove genuineness when surrounding circumstances indicate fraud.

Respondent’s (Assessee) Arguments

  • The assessee submitted:
    • PAN details, bank statements, ITRs, confirmations.
    • Share application forms and audited financials.
  • Transactions were conducted through banking channels.
  • The assessee argued that it had fulfilled:
    • Identity
    • Creditworthiness
    • Genuineness
  • Once documents were provided, onus shifted to the AO to investigate further.

Court Findings / Judgment

The Delhi High Court allowed the appeal of the Revenue and held:

  • The transactions were sham and make-believe, supported only by documentation.
  • The Tribunal failed to consider:
    • Investigation findings.
    • Human probabilities.
    • Surrounding circumstances.
  • The Court emphasized:
    • Section 68 requires substantive examination, not superficial compliance.
    • Mere paperwork like PAN or bank entries is insufficient if entities are non-genuine.
  • The Court held that:

No prudent investor would invest such large sums at unjustified premium without proper business rationale.

 Important Clarifications

  • Three essential tests under Section 68 must be satisfied:
    1. Identity of creditor
    2. Creditworthiness
    3. Genuineness of transaction
  • These must be tested based on:
    • Human probabilities
    • Surrounding circumstances
    • Substance over form
  • The Court distinguished between:
    • Cases with proper documentation but no inquiry
    • Cases with strong evidence of bogus transactions

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:348/SKN17012019ITA492018.pdf

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