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Facts
The Revenue appealed against the CIT(A)'s deletion of additions made by the AO under Section 68 for share application money and trade payables. The AO had treated share premium received from foreign investors and outstanding trade payables as unexplained credits.
Held
The Tribunal held that the assessee had provided sufficient evidence to establish the identity, creditworthiness, and genuineness of the share application money transactions. Regarding trade payables, the Tribunal found that Section 68 is not attracted to amounts representing purchases made on credit, as these are liabilities and not unexplained credits.
Key Issues
Whether the CIT(A) was justified in deleting additions made by the AO under Section 68 on account of share application money and trade payables. The key question is whether these amounts constitute unexplained credits as per Section 68.
Sections Cited
68, 250, 143(2), 142(1)
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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SANDEEP SINGH KARHAILSMT. RENU JAUHRI
Date of Hearing – 24/12/2024 Date of Order – 03/03/2025
O R D E R PER SANDEEP SINGH KARHAIL, J.M. The Revenue has filed the present appeal against the impugned order dated 30/07/2024, passed under section 250 of the Income Tax Act, 1960 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2016-17.
In this appeal, the Revenue has raised the following grounds:
– “1
1. (a) "On the facts and circumstances of the case and in law, whether the learned Ld. CIT(A) was right in deleting addition of Rs. 8,53,94,800/- under section 68 of the Income Tax Act, with a finding that the details and evidences submitted by the assessee were sufficient to prove the genuineness of the transaction of receipt of share application money/ premium money. (b) "On the facts and circumstances of the case and in law, whether the learned Ld. CIT(A) was right in holding that the assessee company, based on the limited details submitted before the AO, had discharged its onus to prove the genuineness of the transactions of receipt of share application money/ premium money, without appreciating the fact that the investors were not resident of the India and money had flown from the sources outside." 2. "On the facts and circumstances of the case and in law, whether the learned Ld. CIT(A) was right in holding that the amount of Rs. 4,32,94,944/- was received in the earlier year and as such it was beyond the purview of the section 68 of the I.T. Act 1961, without appreciating the fact that no such claim was made before the AO, during the course of the assessment and the AO had no occasion to examine this issue during assessment proceedings."
3. (a) "On the facts and circumstances of the case and in law, whether the learned Ld. CIT(A) was right in deleting addition of Rs. 2,10,38,677/- under section 68 of the I.T. Act 1961, without appreciating the fact that during the assessment proceedings the assessee failed to provide the basic details and evidences required for the purpose of verification of the genuineness of the transactions reported under the head trade payables." (b) "On the facts and circumstances of the case and in law, whether the learned Ld. CIT(A) was right in deleting additions made of Rs. 2,10,38,677/- under section 68 of the Income Tax Act, without appreciating that such unproved trades payable constitute income within the meaning of section 68 of the Income Tax Act"
4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting addition on account of share application money amounting to Rs.8,53,94,800/- and of Rs.2,10,38,677/- as trade payables without appreciating the fact that the Supreme Court in Principal CIT v. NRA Iron & Steel Pvt. Ltd. had reiterated the settled position of law regarding Section 68 of the Income Tax Act, 1961 wherein the initial onus is on the assessee to establish by cogent evidence the identity of the creditors, genuineness of the transaction and creditworthiness of the parties under Section 68 of the Act.”
3. The first issue that arises for consideration pertains to the addition made under section 68 of the Act on account of share application money/premium money received by the assessee from the foreign investors.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of manufacturing and others. For the year under consideration, the assessee filed its return of income on 23/11/2016, by declaring a total loss of INR 2,00,51,836. The return filed by the assessee was selected for scrutiny under CASS, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has received INR 8,53,94,800, during the year, as share premium from the following shareholders of the company: –
Name No. of shares issued Share premium received Manish Hiranandani 35,39,214 3,53,92,140/- Girish Hiranandani 50,00,266 5,00,02,660/- Total 8,53,94,800/-
5. Accordingly, the assessee was asked to provide complete details supported by documentary evidence in regard to the identity, genuineness, and creditworthiness of the above-stated share premium received by the assessee. The assessee submitted various details in response to these notices, viz. bank account statements, RBI permission letter for FDI, etc. During the assessment proceedings, the assessee was granted another opportunity to provide specific details with supporting documentary evidence in regard to the identity, genuineness, and creditworthiness of the shareholders from whom the assessee has received share premium during the year. Since, as per the Assessing Officer (“AO”), the assessee did not furnish the requisite evidence to prove the identity, genuineness and creditworthiness of the shareholders, the share premium money amounting to INR 8,53,94,800 was treated as unexplained credits in the accounts of the assessee, and added to its total income under section 68 of the Act.
The learned CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue and deleted the addition made under section 68 of the Act by observing that the details/evidence furnished by the assessee prove the identity of the investors, creditworthiness of the investors, and genuineness of the transaction. Being aggrieved, the Revenue is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. During the year under consideration, the assessee allotted 85,39,480 shares to Mr. Girish Hiranandani and Mr. Manish Hiranandani, who were holding a USA passport and were a resident of Dubai, UAE. As per the assessee, since the shares were issued to the non-residents, the provisions of Foreign Exchange Management Act, 1999 (“FEMA”) were complied with and the transaction of issue of shares was reported to the Reserve Bank of India (“RBI”) by submission of Form FC-GPR. To substantiate the aforesaid facts, the learned Authorised Representative (“learned AR”), during the hearing, referred to the copy of the passport issued by the United States of America to Mr. Girish Hiranandani and Mr. Manish Hiranandani, as well as the residence visa issued by the authorities of the United Arab Emirates. In order to establish the identity of both the individuals and to make good their residential status in Dubai, UAE, the assessee has placed on record the electricity bill issued by the Dubai Electricity and Water Authority to Mr. Girish Hiranandani and Mr. Manish Hiranandani. The aforementioned documents form part of the paper book from pages 271-282. Further, the assessee has also placed on record the copy of ITRs of Mr. Girish Hiranandani and Mr. Manish Hiranandani, for the assessment year 2016-17, filed in India. In order to make good the submission that the entire transaction of issuance of shares by the assessee to Mr. Girish Hiranandani and Mr. Manish Hiranandani was genuine, the assessee has placed on record the bank statements of Mr. Girish Hiranandani and Mr. Manish Hiranandani from which payments were made to the assessee in respect of the aforesaid transaction. Further, the assessee has also placed in the paper book the From FC-GPR issued by assessee’s bank, i.e. ICICI Bank, Navi Mumbai Branch, in respect of the payment received from Mr. Girish Hiranandani, and Fund Transfer Form issued by HSBC Bank authorising transfer of funds from Mr. Manish Hiranandani’s bank account to assessee’s bank account. We find that all these documents were also furnished by the assessee vide its written submissions filed on 03/03/2018, 05/03/2018, 04/12/2018, and 10/12/2018, during the assessment proceedings. Therefore, from the perusal of the aforesaid documents furnished by the assessee, which forms part of the paper book, it is evident that the assessee furnished various details to not only prove the identity and creditworthiness of the investor but also the genuineness of the transaction. In this regard, the assessee has also placed on record the certificate issued by the Chartered Accountant certifying the no. of shares issued to Mr. Girish Hiranandani and Mr. Manish Hiranandani, during the year under consideration, and the method of valuation followed while issuing the shares. It is evident from the record that the AO did not consider any of the aforesaid details and made the addition under section 68 of the Act by considering the share application money as unexplained cash credit, by observing as follows: –
“3.3 In response to the above stated show cause letter, the assessee has submitted details on the ITBA system on 20/12/2019. The details were perused and it is seen that the assessee has again submitted the same details viz. bank account statements, RBI approval etc. and has not submitted any details in regard to the identity, genuineness and creditworthiness of Sh. Girish Hiranandani and Sh. Manish Hiranandani. The following details are very important from the revenue angle: (i) Identity and genuineness Identity of the shareholder is required to ascertain whether it is a genuine entity or not. As the entity mentioned above are Dubai based, the confirmation of their genuineness from the UAE authorities is must, the assesses has not submitted any such details in this office. (ii) Creditworthiness: It is the onus of the assessee to provide the details viz tax returns, audit reports filed with the Indian or UAE tax authorities in regard to prove the creditworthiness of the assessee, whether the assessee is capable of such investment or not. The assessee has not submitted anu details in this regard in this office till this date. Further, enough opportunities have been provided to the assessee to submit documentary evidences to prove the identity, genuineness and creditworthiness of Sh. Girish Hiranandani and Sh. Manish Hiranandani from whom share premium of Rs. 8,53,94,800/- is received during the year, but the assessee has failed in providing the said details. It has also been upheld by the SC in the case of PR.CIT Vs. NRA IRON and STEELS case that: Further, The Hon'ble Supreme Court further held in the case of Principal CIT Vs. NRA Iron & Steel Pvt. Ltd. (Supreme Court) "The practice of conversion of un-accounted money through the cloak of Share Capital/Premium must be subjected to careful This would be particularly so in the case of private placement of shares, where a higher onus is required to be placed on the Assessee since the information is within the personal knowledge of the Assessee. The Assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the Assessee.. On the facts of the present case, clearly the Assessee Company - Respondent failed to discharge the onus required under Section 68 of the Act, the Assessing Officer was justified in adding back the amounts to the Assessee's income." Further, The Hon'ble Supreme Court further held in the case of Smt Sumati Dayal vs. CIT ,28/03/1995
"the majority opinion after considering surrounding circumstances and applying the test of human probabilities has rightly concluded that the appellant's claim about the amount being her winning from races is not genuine. It cannot be said that the explanation offered by the appellant in respect of the said amounts has been rejected unreasonably and that the finding that the said amounts are income of the appellant from other sources is not based on evidence." 3.4 therefore, in light of the above stated facts and circumstances, material available on the record and case laws referred the amount of Rs. 8,53,94,800/- received during the year as share premium money from Sh. Girish Hiranandani and Sh. Manish Hiranandani remains unexplained credits into the accounts of the assessee in absence of justifiable documentary evidences regarding the identity genuineness and creditworthiness of these entities. Therefore, the amount of Rs. 8,53,94,800/- is treated as unexplained credits into the account and added back to the total income of the assessee uls. 68 of the IT Act, 1961.”
However, it is evident from the perusal of the impugned order that the learned CIT(A) has considered all the aforesaid details/documents furnished by the assessee to establish the identity and creditworthiness of the shareholder, and the genuineness of the transaction. In order to further substantiate the creditworthiness of Mr. Girish Hiranandani and Mr. Manish Hiranandani, the assessee also furnished net-worth certificate issued by a Chartered Accountant Firm, i.e. PKF, UAE, before the learned CIT(A). As per the assessee, the aforesaid certificate only substantiates the details already furnished by the assessee during the assessment proceedings. Therefore, having considered the various details furnished by the assessee, we find no merits in the addition made by the AO under section 68 of the Act by considering the share application money received by the assessee as unexplained cash credit, as the assessee has proved the identity and creditworthiness of the investors/shareholders, and the genuineness of the transaction. Accordingly, we find no infirmity in the impugned order in deleting the addition made by the AO under section 68 of the Act on this issue. As a result, the same is upheld and the grounds raised by the Revenue pertaining to this issue are dismissed.
The next issue that arises for consideration pertains to the addition made under section 68 of the Act in respect of trade payables.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, it was noticed that the assessee has debited INR 2,29,74,562 in the profit and loss account towards trade payables. Accordingly, the assessee was asked to provide documentary evidence, viz., name of the parties, address, PAN, ledger details, etc. The assessee submitted various details in response to the notices, viz., name of the parties, ledger details, sample bills, etc. As the details furnished by the assessee were not complete and a number of parties were reported without PAN and addresses, another opportunity was granted to the assessee to furnish the requisite details. After considering the details filed by the assessee in response to the show cause notice, the AO noted that partial details were filed and the assessee has still not submitted complete details regarding the genuineness of the trade payable. Accordingly, the AO, vide assessment order, made an addition of INR 2,10,38,677, being the trade payable amount outstanding in the books of the assessee, by treating the same as unexplained credit under section 68 of the Act.
The learned CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue and deleted the addition of INR 2,10,38,677 made under section 68 of the Act.
We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute regarding the fact that the addition of INR 2,10,38,677 was made by the AO under section 68 of the Act on account of trade payables debited by the assessee in the profit and loss account. Since the assessee could not provide the complete details of the parties to whom the payment is to be made, the AO treated the trade payable amount outstanding in the books of the assessee as unexplained credit and added the same under section 68 of the Act.
From a plain reading of the provisions of section 68 of the Act, it is evident that where any sum is found credited in the books of the assessee and the assessee offers no explanation about the nature and source thereof or the expansion offered by him is not in the opinion of the AO satisfactory, then the sum so credited may be chargeable to income tax as the income of the assessee. However, in the present case, it is discernible that the sum that was treated as unexplained credit by the AO and added to the total income of the assessee under section 68 of the Act is not credited in the assessee's books. Rather, the same is the trade payables, i.e. the trade payable amount outstanding in the books of the assessee, in respect of the purchases made by it, and thus the same represents a liability which was required to be paid subsequently. We find that the Hon’ble Punjab and Haryana High Court in PCIT v/s Kulwinder Singh, reported in [2018] 99 taxmann.com 449 (P&H), held that provisions of section 68 are not attracted to amount representing purchases made on credits. The relevant findings of the Hon’ble High Court, in the aforesaid decision, are reproduced as follows: -
“4. A perusal of the order passed by the Tribunal shows that the assessee had shown numerous sundry creditors along with details in his balance sheet. The assessee being a road Contractor received material for the construction of the road. The amounts in question represented purchases made on credits. According to Section 68 of the Act, where any sum is found credited in the books of account of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source of the same or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be charged to income tax as the income of the assessee of that previous year. It has been categorically recorded by the Tribunal that the provisions of Section 68 of the Act were clearly not attracted to the amount representing purchases made on credits. Further the trade creditors in the earlier years i.e. assessment years 2007-08 and 2008-09 stood accepted in scrutiny assessments. Thus, the genuineness of expenses under consideration could not be doubted. The relevant findings recorded by the Tribunal in this regard read thus:— "Having heard the rival contentions in the light of the material available on record, it is seen that in para-3 of the assessment order, the AO observed that the assessee had shown numerous sundry creditors along with details, as was available from the examination of the assessee's books of account vis-à-vis his balance sheet. The assessee is a road contractor. He received material for the construction of the road. The amounts in question represented purchases made on credits. The provisions of Section 68 of the Act are clearly not attracted to amount representing purchases made on credits, as is also held in 'CIT v. Pancham Dass Jain', 205 CTR 444 (All). The assessee raised this issue by way of written submissions (APB 37 to 160, relevant portion at para-5, on page 43) dated 10.05.2014 filed before the CIT(A). The ld. CIT(A) has, however, not addressed this grievance at all and merely upheld the addition made under Section 68 of the Act. On behalf of the assessee, a comparative chart of net profit rate of the assessee for the assessment years 2005-06 to 2011-2012 has been filed before us. In the earlier years also, no such addition was made. For the assessment year 2007-08, under scrutiny assessment, the assessment was made at 8%. The position remained much the same for the assessment year 2008-09. The year under consideration is assessment year 2009-10. The material supplied to the assessee by the concerned department is part of the assessee's turnover. The net profit rate of the assessee for the year under consideration was in line with the preceding assessment year. Further, the trade creditors in the earlier years, i.e. assessment years 2007-08 and 2008- 09 stand accepted in scrutiny assessments. Thus, the genuineness of the expenses under consideration cannot be doubted. Moreover, the genuineness of the expenditure was not at all called into question. It was only that no- verification thereof raised doubts of the incurrence thereof. Then, even if the credits concerning the purchases and transportation of the material are not to be accepted, as discussed, still, the provisions of Section 68 of the Act cannot be invoked to make the addition."
Learned counsel for the appellant-revenue has not been able to show that the findings recorded by the Tribunal are illegal or perverse or based on misreading of any material on record, warranting interference by this Court. Thus, no substantial question of law arises. Consequently, the appeal stands dismissed.”
Therefore, in view of the facts and circumstances of the present case, we do not find any infirmity in the findings of the learned CIT(A) in deleting the addition made by the AO under section 68 of the Act on account of trade payables debited to the profit and loss account of the assessee. As a result, the same are upheld and the grounds raised by the Revenue pertaining to this issue are dismissed.
In the result, the appeal by the Revenue is dismissed. Order pronounced in the open Court on 03/03/2025