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Facts
The assessee company was incorporated in 2010 and issued shares with significant premium in FY 2011-12. The company had nominal income and no significant assets. Despite opportunities, the assessee failed to provide adequate documentation to establish the genuineness and creditworthiness of the share subscribers.
Held
The Tribunal held that the assessee failed to discharge its onus to prove the genuineness and creditworthiness of the share transactions, especially considering the company's weak financial standing. Reliance was placed on various judicial pronouncements where similar circumstances led to the addition of share premium as unexplained cash credit under Section 68 of the Act.
Key Issues
Whether the addition of share capital/premium under Section 68 of the Income Tax Act is justified when the assessee fails to establish the genuineness and creditworthiness of the investors, especially in light of the company's weak financial position and lack of proper documentation.
Sections Cited
68, 144, 250, 131, 133(6), 143(3)
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Income Tax Appellate Tribunal, “C” BENCH KOLKATA
Assessment Year: 2012-13 Moonlink Marketing Private Limited C/o Jain Vinod K & Associates 41A, A.J.C Bose Road, Suite No. 613, 6th Floor, Kolkata - 700017 [PAN: AAGCM4925P] .....................…...……………....Appellant vs. Income Tax Officer, Ward-7(1), Kolkata Aayakar Bhavan, P-7, Chowringhee Square, Kolkata - 700001 ...............…..….................... Respondent Appearances by: Assessee represented by : Vinod Kumar Jain, AR Department represented by : Praveen Kishore, CIT-DR Date of concluding the hearing : 16.04.2025 Date of pronouncing the order : 22.05.2025
ORDER
PER SANJAY AWASTHI, ACCOUNTANT MEMBER:
The present appeal is filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “the Ld. CIT(A)”] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2012-13, dated 11.12.2023, which has been passed against the assessment order u/s 144 of the Act, dated 09.03.2015.
1.1 In this case, vide order dated 09.03.2015 passed under Section 144 of the Act, an addition of ₹ 18,29,00,000/- was made under Section 68 of the Act on account of share capital/premium claimed by the Moonlink Marketing Private Limited assessee. The Ld. AO passed this order after there was no response from the Directors of the assessee company in response to summons issued by the Ld. AO under Section 131 of the Act. Also, notices u/s 133(6) of the Act issued to 07 parties, who had subscribed to shares of the assessee company, resulted in some details which were not considered adequate by the authorities below. Since, there is a considerable recording of facts by the Ld. AO and Ld. CIT(A), it is important to highlight and summarise the same as that would be required for adjudication. The facts may be summarised as under: The assessee company is seen to have been incorporated on 19.4.2010. During Financial Year (F.Y.) 2011-12 it issued its shares (face value of Rs 10) to different Private Limited Companies, after charging either no premium (in the case of 2 subscribers: Horde Tradelink Pvt Ltd and Funidea Dealmark Pvt Ltd), or high premiums of Rs 9990 in the case of remaining 5 subscribers (Page 1 of Ld. AO's order and page 23 of impugned order). No significant assets were noticed in the assessee company by the Ld. CIT(A). It is recorded that for AY 2011-12 (preceding year), there was no Sales/Turnover recorded, but only other income of Rs. 1,35,000, which yielded a net profit of Rs 1,046, after expenses. In similar manner a net profit of Rs 5,768 was declared for the present AY. Thus, it has been attempted to be demonstrated that the assessee company did not have a strong financial track record or asset base indicating a poor balance sheet and there were, apparently, no signs of a bright future in terms of business prospects. (page 22 of the impugned order). On pages 24 to 32 of the impugned order, the apparent lack of creditworthiness of all the share subscribers has been discussed at length. The Ld CIT(A) has given detailed findings regarding the financial status of the investor companies by recording that they are investment Moonlink Marketing Private Limited companies, in their initial years of operation, showing a nominal income invariably; no noticeable business activity; and such companies received share capital with premium, which was invested in the assessee company. The appellant/assessee was given several opportunities to produce certain documents/information and was also asked to produce books of accounts, and other details by the Ld.AO but the appellant failed to do so. In fact, summons were issued to the Directors of the assessee company for establishing the genuineness, identity and creditworthiness aspects of the transactions. It is recorded that these summons remained uncompiled with to the extent that the Directors did not present themselves for any verification or interrogation before the Ld. AO. (pages 1 and 2 of Ld. AO’s order). 1.2 On the basis of findings given in the Ld. AO's order the impugned addition of ₹ 18,29,00,000/- was challenged before the Ld. CIT(A), who has, as has been mentioned earlier, vide his order dated 11.12.2023 affirmed the action of Ld. Assessing Officer through detailed findings. However, the most critical fact finding is contained in page 22 of the impugned order as under: “11. The assessee company was incorporated in the preceding financial year, on 19.04.2010. In the preceding A.Y. (2011-12), the Sales/Turn over was Nil and Other income was at Rs. 1,35,000/-. After claiming some vague expenses, the profit was at Rs. 1046/-. The authorized capital was Rs. 1,00,000/-. The same was also issued, subscribed and paid up. The corresponding asset included cash of Rs. 88,020/- and bank balance of Rs. 9890/-. For the year under consideration, i.e. on 31.03.2012, the issued subscribed and paid up capital was at Rs. 42,78,900/- and the security premium was at Rs. 17,87,21,100/-. The corresponding assets were investment in equity shares of private companies at Rs. 18,29,00,000/- and cash and bank balance of Rs. 18,04,889/-. There was no Sale/turn over for this year also and income of Rs. 1,80,000/- was shown as "Any other income". After claiming some vague expenses, the profit was declared at Rs. 5768/-. The balance sheet for the subsequent A.Y. (2013-14) does not show much change over the balance sheet as on 31.03.2012. Like the preceding two years, the Sales/Turn over was nil. Income of Rs. 1,92,994/- was declared from commission and accounting charges. The net profit was declared at Rs. 2829/-. In view of the above facts on record, AO's observation that summons u/s 131 was issued with objective 3 Moonlink Marketing Private Limited to verify the affairs of the assessee company and its shareholders as well as to verify the genuineness of the transactions and creditworthiness of the investing parties, particularly when the premium per share was at Rs. 9990/-, were valid ones. AO was of the view that in private limited companies, generally persons known to the directors subscribe to shares. Therefore, it was incumbent upon the assessee to establish the genuineness of the transaction along with the identity and creditworthiness of the investing parties. In the given circumstances of the case, the personal appearance by the director was a major non-compliance. Moreover, in compliance to notices u/s 142(1), only symbolic details were filed. The assessee never furnished details of the manner in which investment was sought and the justification regarding the premium of Rs. 9990/- per share.” It is seen that the Ld. CIT(A) has also relied on a large number of authorities in support of the contentions that the provisions of section 68 of the Act were clearly attracted to the facts of the present case.
Aggrieved with this action of Ld. CIT(A), the appellant has filed as many as 4 grounds of appeal
which for the sake of perspective are extracted as under: “1. The Ld. CIT(A) eared in law as well as on facts to affirm the addition made by Assessing Officer.
2. The Ld. CIT(A) eared on facts to state that assessee failed to discharged its prima face onus to prove the identity, credit worthiness and genuineness of the transactions.
3. The Ld. CIT(A) eared in law as well as on facts by affirming the only grounds for addition u/s.68 by non-adherence of summon u/s.131 whereas. The Ld. CIT(A) out to know that share subscribers have submitted documentary evidences to affirm the transactions.
4. That the appellate craves leave to add, modify or amend the ground of appeal and to adduce additional evidence in support of ground of appeal at the time of hearing of the case.” Through the grounds, the appellant has assailed the action of Ld. AO/CIT(A) with respect to the impugned addition under Section 68 of the Act.
2.1 Before us, the Ld. Authorised Representative took pains to point out that all the share subscribers were existing corporate entities. It was also averred that all the transaction were done through banking channels and the same had been meticulously documented before the Ld. AO/CIT(A). The Ld. Authorised Representative also stated that 4 Moonlink Marketing Private Limited merely because the Directors of the assessee company could not present themselves for interrogation etc. does not mean that the company is non-genuine and hence doubtful. It was stated that some documents were filed in response to summons and there was a response from share subscribers with respect to notices u/s 133(6) of the Act. The Ld. AR supplied a sheet of paper in which the dates of notices and their responses were mentioned. He further argued that the assessee could not have done any better than submitting the kind of documents that he actually did for proving the genuineness of the impugned transactions. The Ld. AR took us through the contents of a paper book running into 114 pages which essentially contained the financial details of the assessee company. The Ld. Authorised Representative assailed the action of the authorities below and reiterated his contention that the assessee had done everything possible to escape the rigours of action under Section 68 of the Act by establishing the bonafides of the transactions and had presented all manner of documents to justify the transactions and the identity etc. of such subscribers. 2.2. The Ld. Departmental Representative, on the other hand stated that it was highly doubtful that a company having a meagre turnover and profitability could become so attractive to presumably prudent businessmen that they would pay a substantial premium over the face value of each equity share to the extent that such quantum of premia were not commanded by even much better known and publicly held companies. The Ld. Departmental Representative also relied on the following case laws: (i) BST Infratech Ltd. reported in 468 ITR 111 (Cal) (ii) Balgopal Merchants reported in 468 ITR 136 (Cal) He mentioned that there were good factual similarities between the cases of BST Infratech [reported in 468 ITR 111 (Cal)] and the case Moonlink Marketing Private Limited of Balgopal Merchants (P) ltd [reported in 468 ITR 136 (Cal)], vis-à-vis the present matter.
We have heard the rival contentions and considered the documents filed by Ld AR, as also the orders of authorities below. The points for consideration are whether the impugned transactions were justifiable on the strength of documents filed by the assessee or there was inadequacy in that regard. To begin with, we need to examine the contention of authorities below that the assessee had very weak financials to justify the premia charged on the shares issued to various subscribers. The Profit and Loss statement, filed in the paper book, needs to be extracted for perspective:
3.1. It is seen that the profit and loss account filed by the assessee paints a rather grim picture about the qualitative aspect of commercial activity which would certainly not justify the kind of premiums charged by the appellant. Thus, total revenues of Rs 1,80,000 with profit of Rs 3984.77, for the year ending on 31.3.2012 is visible (page 7 of the paper 6 Moonlink Marketing Private Limited book, extracted supra), which cannot be said to indicate a healthy bottom-line or even a robust business model. Considering this fact, it would have been all the more prudent to examine the genuineness etc. of the 07 concerns which chose to repose considerable faith in the commercial future of the assessee to trust them with huge sums of money. It would be seen from the orders of Ld.AO/CIT(A) that this exercise was duly undertaken and the adverse conclusions flowed therefrom. It was under somewhat similar circumstances when the Hon'ble Jurisdictional High Court upheld the doubtful nature of share premium monies being given to companies having weak commercial credentials, in the case of PCIT vs. BST Infratech Ltd. reported in [2024] 161 taxmann.com 668 (Calcutta). The Hon'ble Calcutta High Court had occasion to observe that in the said case investors had no reason to invest huge amounts in business of that assessee and the entire transaction was done to circumvent the provisions of the Act. It has been held that the action of the assessing officer in treating such share application money u/s 68 of the Act as undisclosed cash credit was justified. The relevant portion from this order deserves to be extracted as under: “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.
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 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 7 Moonlink Marketing Private Limited 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.
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.
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.” 3.2. Considerable strength is also drawn from the case of PCIT vs. NRA 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 discharge the onus of the assessee, if the capacity or credit-worthiness has not been established. [Para 8.3] Moonlink Marketing Private Limited 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. 9 Moonlink Marketing Private Limited 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 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] 3.3. 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 Moonlink Marketing Private Limited of transaction of share capital received, addition made under section 68 was valid - Held, yes [Paras 25, 30 and 31]” 3.4. A close reading of the case laws cited (supra) reveals that mere filing of confirmations and the income tax details etc. are not enough to justify payment of monies as share premium when the financial aspects of the recipient company would not merit such investments under any kind of prudent commercial consideration, at least on the basis of financials presented before us in the paper book filed by the appellant, and the financial details of share subscribers discussed in detail by the Ld. CIT(A). In the present case, it is recorded in para 2.3 at page 1 of Ld. AO’s order that summons were issued to the Directors of the assessee Company for establishing the genuineness, identity and creditworthiness aspects of the transactions, however, the Directors did not present themselves for verification. It is evident that even those share applicants who did file certain documents, were not found to be sufficient in the eyes of law to discharge the burden cast on the assessee regarding proving the genuineness, etc of the transactions. The profit and loss account statement extracted (supra) would normally paint a grim picture to any prudent investor, however, in this case it seems to have encouraged 07 entities to transfer huge sums of money by way of share premia, ranging from Rs. 0 to Rs. 9990 per equity share. 3.5. It is seen that the appellant has a very nominal income, during the year under consideration, as discussed elsewhere in this order. It is clear that such sub-par financials cannot justify high premiums per share, as recorded by the Ld. AO, and affirmed by the Ld. CIT(A), to any prudent investor. Accordingly, the insistence by the ld. AO for ensuring the presence of the Directors of the appellant company for verification was justified. Merely the filing of financial statements, income tax details and bank statements will not be enough to prove the genuineness of the transaction in a closely held company, which is certainly distinct from a widely held company in which the general 11 Moonlink Marketing Private Limited public is invited to invest and, needless to say, the public invests on a fair appraisal of the financials and future prospects of the company. In this case, the ld. AO was right in insisting on more verification than whatever the appellant was willing to submit before him. In this regard a recent case of the Hon'ble Calcutta High Court deserves to be discussed as well. In PCIT vs. One Point Commercial (P.) Ltd. reported in [2024] 161 taxmann.com 737 (Calcutta) on similar facts the Hon’ble Jurisdictional High Court has given an order which will help in deciding this case conclusively. Certain portions deserve to be extracted from the said order as under: