Facts of the Case

The assessee, Exotica Enclave Pvt. Ltd., is a private limited company engaged in the business of real estate. It filed its return of income for Assessment Year 2012-13 on 24.12.2012 declaring total income of ₹68,130. The case was selected for scrutiny and notices under Sections 143(2) and 142(1) were duly issued. During the year, the assessee raised share capital aggregating to ₹60,00,000 from four subscribers, comprising three individuals and one company, all belonging to the promoter Goel family. The Assessing Officer called upon the assessee to explain the source of share capital, and the assessee furnished confirmations, income-tax returns, bank statements and audited financial statements of all subscribers. Summons under Section 131 were issued and complied with, and the Director of the assessee company appeared and explained the rationale for issuance of shares at a premium. The Assessing Officer, however, was not satisfied and treated the entire share capital as unexplained cash credit under Section 68. In appeal, the CIT(A) deleted ₹5,00,000 relating to one shareholder and sustained addition of ₹55,00,000 in respect of the remaining three subscribers.

Issues Involved

Whether share capital received from promoter-group shareholders could be treated as unexplained cash credit under Section 68 for Assessment Year 2012-13, whether the assessee was required to explain the source of source prior to insertion of the proviso to Section 68, whether the identity, creditworthiness and genuineness of the shareholders stood established, and whether addition could be sustained on the basis of suspicion regarding source of funds.

Petitioner’s Arguments

The assessee contended that complete documentary evidence establishing identity, creditworthiness and genuineness of all shareholders had been furnished. It was argued that summons under Section 131 were duly complied with and that the Assessing Officer never doubted the identity of the shareholders, all of whom belonged to the same promoter group. The assessee submitted that the proviso to Section 68 requiring explanation of source of source was introduced by the Finance Act, 2012 with effect from Assessment Year 2013-14 and was not applicable to the year under consideration. It was further submitted that the funds invested by the shareholders were traceable to their proprietorship concerns and business receipts, and that addition sustained by the CIT(A) was based merely on suspicion and conjecture.

Respondent’s Arguments

The Revenue supported the order of the CIT(A) and contended that the CIT(A) had examined the source of funds of each shareholder in detail and rightly confirmed the addition in respect of those shareholders whose source of funds appeared doubtful.

Court Order / Findings

The ITAT Kolkata held that the assessee had discharged its onus under Section 68 by establishing the identity, creditworthiness and genuineness of all share subscribers through documentary evidence. The Tribunal observed that the shareholders were part of the promoter group and that their sources of funds were duly explained and verifiable. It was held that the observations of the CIT(A) doubting the source of funds were based on suspicion without bringing any tangible adverse material on record. The Tribunal further held that the proviso to Section 68 inserted by the Finance Act, 2012 is prospective and applicable only from Assessment Year 2013-14, and therefore the assessee was not required to explain the source of source for Assessment Year 2012-13. Relying on the Bombay High Court decision in CIT vs. Gagandeep Infrastructure Pvt. Ltd. and the Supreme Court decision in CIT vs. Lovely Exports (P) Ltd., the Tribunal held that addition under Section 68 was not sustainable.

Important Clarification

The Tribunal clarified that for Assessment Years prior to insertion of the proviso to Section 68, the assessee is required to establish only the identity, creditworthiness and genuineness of the shareholders. High share premium or suspicion regarding source of funds, without cogent evidence, cannot justify an addition under Section 68. If the Revenue harbours doubts about the shareholders, the remedy lies in proceeding against them in accordance with law.

Final Outcome

The appeal filed by the assessee was allowed. The addition of ₹55,00,000 sustained by the CIT(A) under Section 68 of the Income-tax Act for Assessment Year 2012-13 was directed to be deleted in full.

Source Link- https://itat.gov.in/public/files/upload/1768223166-jMa9kz-1-TO.pdf

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