Facts of the Case

The assessee, Abhiruchi Marketing Pvt. Ltd., filed its return of income for Assessment Year 2008-09 declaring total income of ₹157. The case was initially processed under Section 143(1) and subsequently reopened under Section 147. After completion of reassessment, the Principal Commissioner invoked revisionary jurisdiction under Section 263 on the ground that proper enquiry regarding share capital and share premium had not been conducted. Pursuant thereto, the Assessing Officer issued notices under Section 142(1) and called for details of share application money aggregating to ₹4,28,70,000 received from fourteen private limited companies. The assessee furnished complete documentary evidence including names, addresses, PANs, income-tax returns, audited financial statements, bank statements and confirmations. Notices under Section 133(6) were issued, which were complied with by most of the investors. The Assessing Officer, however, treated the entire amount as unexplained cash credit under Section 68 on the ground that the investors had low taxable income, funds were received through inter-corporate transfers, and shares were issued at a high premium. The addition was confirmed by the CIT(A), leading to the second round of appeal before the Tribunal.

Issues Involved

Whether share capital and share premium received during Assessment Year 2008-09 could be treated as unexplained cash credit under Section 68 when the assessee had furnished complete evidence of identity, creditworthiness and genuineness of the investors, whether low taxable income of investor companies or high share premium is a valid ground for addition, and whether the proviso to Section 68 requiring explanation of source of source applies retrospectively.

Petitioner’s Arguments

The assessee contended that it had fully discharged the onus under Section 68 by furnishing comprehensive documentary evidence in respect of all fourteen share subscribers. It was argued that all investors were existing corporate entities assessed to tax and most of them had responded to notices issued under Section 133(6). The assessee submitted that low taxable income or receipt of funds through banking channels from other entities cannot by itself negate creditworthiness. It was further contended that the proviso to Section 68 introduced 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 AY 2008-09. Reliance was placed on judicial precedents including CIT vs. Orissa Corporation Ltd., CIT vs. Gagandeep Infrastructure Pvt. Ltd., CIT vs. Lovely Exports (P) Ltd. and Crystal Networks Pvt. Ltd. vs. CIT.

Respondent’s Arguments

The Revenue supported the orders of the lower authorities and contended that the assessee failed to prove the creditworthiness of the investors, as they had negligible taxable income and funds were allegedly rotated through layers of companies. It was further argued that issuance of shares at high premium without commercial justification rendered the transactions non-genuine.

Court Order / Findings

The ITAT Kolkata held that the assessee had duly discharged its initial burden under Section 68 by furnishing names, addresses, PANs, bank statements, audited accounts and income-tax returns of all the investor companies. The Tribunal observed that most of the investors had responded to notices under Section 133(6) and that all investors were corporate entities assessed to tax. It was held that low taxable income of investors cannot be the sole criterion to doubt creditworthiness, and that high share premium, by itself, is not a ground for addition for Assessment Year 2008-09. The Tribunal categorically 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. Relying on the decisions of the Supreme Court in Orissa Corporation Ltd., the Bombay High Court in Gagandeep Infrastructure Pvt. Ltd., and other binding precedents, the Tribunal held that if the Revenue doubted the investors, the proper course was to proceed against them and not to make addition in the hands of the assessee. Accordingly, the addition was directed to be deleted.

Important Clarification

The Tribunal clarified that for Assessment Years prior to introduction of the proviso to Section 68, the assessee is required to establish only the identity of the investors, their creditworthiness and the genuineness of the transaction. Low income of investors, inter-corporate fund movement or high share premium cannot justify an addition under Section 68 in the absence of adverse material. Non-compliance by some investors to notices under Section 133(6) is also not decisive when sufficient documentary evidence is on record.

Final Outcome

The appeal filed by the assessee was allowed. The addition of ₹4,28,70,000 made under Section 68 of the Income-tax Act on account of share capital and share premium for Assessment Year 2008-09 was directed to be deleted in full.

Source Link- https://itat.gov.in/public/files/upload/1767330391-JcN569-1-TO.pdf

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