SURAJGOVIND ESTATES PVT. LTD.,KOLKATA vs. D.C.I.T., CIRCLE - 4(2), KOLKATA, KOLKATA
PER SANJAY AWASTHI, ACCOUNTANT MEMBER 1. The present appeal arises from order u/s 250 of the Income Tax Act, 1961 (hereafter “the Act”), passed by Ld. Commissioner of Income Tax (Appeals), [hereinafter “the Ld. CIT(A), vide order dated 03.04.2024. 1.1 In this case, an addition of Rs. 3,00,80,000/- has been made u/s 68 of the Act, pertaining to the amount received on subscription of equity shares of the assessee company. The Ld. AO, vide his order dated 27.12.2017, has recorded a detailed finding through which he has doubted the genuineness of impugned transaction and the creditworthiness of the investors. It is seen that the Ld. AO had initiated considerable enquiries in 2 Surajgovind Estates Pvt. Ltd.
an attempt to verify the genuineness of the impugned transactions which resulted in subscription of equity shares amounting to Rs. 9,88,17,500/- through issue of 9,88,175/- shares @ Rs. 100/- per share. The Ld. AO issued notice u/s 133(6) of the Act to all the share subscribers, except to two non-resident persons. The Ld. AO found that the payments made to the assessee company were immediately preceded by deposits in respective bank accounts. The Ld. AO has also recorded that the assessee is a loss- making company at least from assessment years 2007-08 to 2015-16. The poor financials were treated as evidence that the assessee company could not have attracted any equity participation by investors. Thereafter, the Ld.
AO issued summons u/s 131 of the Act to all the investors for deposing before him and explaining relevant entries in their books of accounts.
Needless to say, none of the investors appeared before the Ld. AO in response to such summons. These factors prompted the Ld. AO to make the impugned addition which duly gave credit to amounts shown against two non-resident investors viz. Ms. Pushpa Patel and Mr. Mahendra Kumar
Rajivbhai Patel.
1.2
Aggrieved with this action, the assessee approached the Ld. CIT(A) where also he could not succeed, unfortunately on the basis of a very cryptic and non-speaking order. The Ld. CIT(A) has supported the AO’s findings in holding the issue against the assessee.
1.3
Further aggrieved, the assessee has approached the ITAT with grounds of appeal which run into several pages and are 12 in number. For the sake of brevity, the issues as per the grounds are summarized as under:
(a) The impugned order is non speaking and cryptic;
(b) The impugned addition is made on surmises and conjectures; and (c) The Ld. AO did not consider the voluminous documents supplied to him in explanation for the impugned transaction.
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Before us, the Ld. AR vehemently argued that in response to notice u/s 133(6) of the Act the share investors had supplied the Ld. AO with considerable number of documents to establish the genuineness of the transactions concerned. The Ld. AR stated that merely because the equity investors did not appear before the Ld. AO could not mean that the transactions were non-genuine. The Ld. AR took us through several documents from the paper book and attempted to demonstrate that the identity of the investors and their creditworthiness and the genuineness of the transaction was duly established. The Ld. AR explained that the investors were all connected entities and persons who had decided to convert the loans and advances to equity shares. It was averred that a number of equity investors were filing returns with substantial incomes. The Ld. AR prayed for relief on the ground that the onus was discharged by the assessee to escape the rigours of section 68 of the Act. 2.1 The Ld. DR, on the other hand, relied on the orders to authorities below. 3. We have carefully considered the rival submission and have gone through the documents before us. A review of judicial literature on the subject of subscribing to equity shares of unlisted companies reveals that the onus cast on the assessee is fairly strict and certainly travels beyond mere filing of confirmation etc. Certain illuminating passages from the case of BST Infratech Ltd. reported in 161 taxmann.com 668 (Calcutta) deserves to be extracted: “36. In Swati Bajaj, the court held that based on the foundational facts the department has adopted the concept of "working backward" leading to the assessee. The department would be well justified in considering the surrounding circumstances, the normal human conduct of a prudent investor, the probabilities that may spill over and then arrive at a decision. 37. Thus the CIT(A) was right in adopting a logical process of reasoning considering the totality of the facts and circumstances surrounding the allegations made against the assessee taking note of the minimum and proximate facts and circumstances surrounding the events on which charges
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are founded so as to reach a reasonable conclusion and rightly applied the test that a reasonable/prudent man would apply to arrive at a conclusion. On facts we are convinced to hold that the assessee has not established the capacity of the investors to advance moneys for purchase of above shares at a high premium. The credit worthiness of those investors companies is questionable and the explanation offered by the assessee, at any stretch of imagination cannot be construed to be a satisfactory explanation of the nature of the source.
The assessee has miserably failed to establish genuineness of the transaction by cogent and credible evidence and that the investments made in its share capital were genuine. As noted above merely proving the identity of the investors does not discharge the onus on the assessee if the capacity or the credit worthiness has not been established.
38. In the light of the above discussion, we hold that the assessee has failed to discharge legal obligation to prove the genuineness of the transaction and the credit worthiness of the investor which has shown to be so by a "round tripping"
of funds. For all the above reasons, the revenue succeeds.
39. In the result the appeal is allowed, the order passed by the learned Tribunal is set aside and the order passed by the CIT(A) dated 28.11.2019 is restored and the substantial questions of law are answered in favour of the revenue.”
3.1
Iron & Steel (P.) Ltd. reported in [2019] 412 ITR 161 (SC) in which share application money was approved for action u/s 68 of the Act even where the share applicants had filed confirmations and attempted to show that the transactions had taken place through normal banking channels, etc. In this case, the Hon'ble Apex Court has dealt with the issue from a legal perspective and some of the passages deserve to be extracted for reference:
“This Court in the land mark case of Kale Khan Mohammad Hanif v. CIT [1963]
50 ITR 1 (SC) and, Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) laid down that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction, and creditworthiness, then the Assessing Officer must conduct an inquiry, and call for more details before invoking section 68. If the assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the revenue to hold that it is the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source. [Para 8.2]
With respect to the issue of genuineness of transaction, it is for the assessee to prove by cogent and credible evidence, that the investments made in share capital are genuine borrowings, since the facts are exclusively within the assessee's knowledge. Merely, proving the identity of the investors does not 5
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discharge the onus of the assessee, if the capacity or credit-worthiness has not been established. [Para 8.3]
The Assessing Officer ought to conduct an independent enquiry to verify the genuineness of the credit entries. In the instant case, the Assessing Officer made an independent and detailed enquiry, including survey of the so-called investor companies from Mumbai, Kolkata and Guwahati to verify the credit-worthiness of the parties, the source of funds invested, and the genuineness of the transactions. The field reports revealed that the shareholders were either non- existent, or lacked creditworthiness. [Para 9]
The principles which emerge where sums of money are credited as Share
Capital/Premium are:
i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and creditworthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the Assessing Officer, so as to discharge the primary onus.
ii. The Assessing Officer is duty bound to investigate the creditworthiness of the creditor/ subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders.
iii. If the inquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by section 68. [Para 11]
In the instant case, the Assessing Officer had conducted detailed enquiry which revealed that:
i. There was no material on record to prove, or even remotely suggest, that the share application money was received from independent legal entities. The survey revealed that some of the investor companies were non-existent, and had no office at the address mentioned by the assessee. The genuineness of the transaction was found to be completely doubtful.
ii. The enquiries revealed that the investor companies had filed returns for a negligible taxable income, which would show that the investors did not have the financial capacity to invest funds ranging between Rs. 90 lakhs to Rs. 95 lakhs in the assessment year 2009-10, for purchase of shares at such a high premium.
iii. There was no explanation whatsoever offered as to why the investor companies had applied for shares of the assessee company at a high premium of Rs. 190 per share, even though the face value of the share was Rs. 10 per share.
iv. Furthermore, none of the so-called investor companies established the source of funds from which the high share premium was invested.
v. The mere mention of the income tax file number of an investor was not sufficient to discharge the onus under section 68. [Para 12]
The practice of conversion of un-accounted money through the cloak of Share
Capital/Premium must be subjected to careful scrutiny. This would be particularly so in the case of private placement of shares, where a higher onus
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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 Assessing
Officer, failure of which, would justify addition of the said amount to the income of the assessee. [Para 14]
On the facts of the present case, clearly the assessee company - respondent failed to discharge the onus required under section 68, the Assessing Officer was justified in adding back the amounts to the assessee's income. [Para 15]”
3.2. It is seen that in another case on somewhat similar facts, the Hon'ble Calcutta High Court in the case of Balgopal Merchants (P.) Ltd.
vs. PCIT reported in [2024] 162 taxmann.com 465 (Calcutta) has held that action u/s 68 of the Act was justified. This case law has some similarity of facts with the present matter as the question of non-appearance of Directors for examination and very weak financials, as in the present case, were factors leading to the dismissal of assessee’s appeal. The head note of this case law may be extracted for reference:
Section 68 of the Income-tax Act, 1961 - Cash credit (Share application money) -
Assessment year 2012-13 - Assessee-company was engaged in business of trading and dealing in land - Assessing Officer noted that business of assessee was only investment and during previous year, assessee had received huge share application money along with premium - Assessing “Officer issued summons under section 131 to directors of assessee-company calling upon them to produce proof of identity/PAN card, list of companies where assessee was a director or shareholder, etc. - However, there was no compliance of summons -
Assessing Officer, thus, completed assessment under section 143(3) by adding amount of share application money received along with premium amount under section 68 on ground that it was only a facade for conversion of unaccounted money - It was noted that assessee was a newly incorporated company and it was in first year of its operation that to a broken year - There was no noticeable business activity or book value/earnings per share which could justify very high share premium - Assessee had itself claimed that there was no noticeable business activity during year - Whether thus, assessee having failed to establish basic ingredients required to be established under section 68 i.e., identity, creditworthiness and genuineness of transaction of share capital received, addition made under section 68 was valid - Held, yes [Paras 25, 30 and 31”
3.3
A discussion on the case laws as above, may give rise to a justifiable query that the issue to be dealt with herein pertained to high share premiums on equity shares, while here the equity shares have been subscribed @ 100/- only, presumably the face value. It needs to be mentioned that the principles culled out from the case laws discussed above reveal that mere filing of documents cannot be sufficient to discharge
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the liability of an assessee with respect to section 68 of the Act. Admittedly, the assessee is a loss-making company with huge accumulated losses, therefore, the Ld. AO was justified in wanting to verify the credentials of equity investors who are willing to invest in a company which apparently does not exhibit any bright future regarding financial prospects. In this regard, the Ld. AO’s attempt to elicit further information through summons u/s 131 of the Act, cannot be faulted. However, we are unfortunately faced with a sub-par impugned order which has not discussed any of the factual aspects which could have presented us with an opportunity for any adjudication on facts. Accordingly, we deem it fit to set aside the impugned order and remand this matter back to the file of Ld. AO for fresh assessment. It is directed that the assessee would do its best to produce the equity investors for examination and verification before the Ld. AO and in case, the assessee fails to do so, the Ld. AO would be at liberty to issue summons u/s 131 of the Act and thereafter in case no compliance is made thereon then an adverse view could be taken, if required.
4. In result, appeal of the assessee is allowed for statistical purposes.
Order pronounced on 19.08.2025 (Sonjoy Sarma) (Sanjay Awasthi)
Judicial Member Accountant Member
Dated: 19.08.2025
AK, Sr. P.S.
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Copy of the order forwarded to:
1. Appellant
2. Respondent
3. Pr. CIT
4. CIT(A)
CIT(DR)
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By order