Facts of the Case

The assessee, Alfa Bhoj Limited, was subjected to search and seizure proceedings under Section 132 of the Income Tax Act on 10 November 2004. Subsequently, notice under Section 153A was issued. During proceedings, the assessee disclosed undisclosed income of ₹17 lakhs before the Settlement Commission; however, the application was dismissed due to non-payment of tax.

During assessment, the Assessing Officer examined seized documents and found that the assessee had received substantial share application money from multiple entities. Statements of directors/partners of these entities revealed that they were merely accommodation entry providers (name lenders).

Accordingly, the Assessing Officer treated the share capital amounting to ₹5.72 crores as bogus under Section 68.

Issues Involved

  1. Whether share application money received by the assessee constituted unexplained cash credit under Section 68 of the Income Tax Act.
  2. Whether the assessee was entitled to benefit of peak credit theory on alleged rotation of funds.
  3. Whether findings of the Income Tax Appellate Tribunal affirming addition were justified.

Petitioner’s Arguments (Assessee)

  • The assessee contended that the share application money was rotated in multiple transactions.
  • It argued that only the peak amount (₹1.55 crores) should be treated as unexplained income instead of the entire amount.
  • The assessee sought relief by applying the peak credit theory.

Respondent’s Arguments (Revenue)

  • The Revenue submitted that all alleged shareholders were accommodation entry providers who admitted to being name lenders.
  • The assessee failed to establish identity, creditworthiness, and genuineness of transactions as required under Section 68.
  • The entire share capital was bogus and not merely rotated funds.

Court Findings / Order

The Delhi High Court dismissed the appeal and upheld the addition of ₹5.72 crores under Section 68, observing:

  • The assessee had accepted receipt of bogus share capital on different dates.
  • There was no evidence to show that the amounts were returned or genuinely rotated.
  • The theory of peak credit was not applicable in the facts of the case.
  • The Tribunal’s findings were factual and did not warrant interference under Section 260A.

The Court also granted liberty to the assessee to pursue separate remedies regarding an additional issue of ₹62 lakhs under Section 254(2).

Important Clarification

  • Mere claim of rotation of funds is insufficient unless supported by evidence.
  • Where accommodation entries are established, the entire amount can be taxed under Section 68.
  • Peak credit theory is not automatically applicable in cases involving bogus share capital.

Sections Involved

  • Section 68 – Unexplained Cash Credit
  • Section 132 – Search and Seizure
  • Section 153A – Assessment in Case of Search
  • Section 260A – Appeal to High Court
  • Section 254(2) – Rectification by Tribunal

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:326-DB/SKN16012019ITA272019.pdf

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