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Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA
Before: SRI RAJPAL YADAV, VICE- & SRI SANJAY AWASTHI
order
: August 21st, 2024 ORDER
Per Sanjay Awasthi, Accountant Member:
In this case, the assessee filed return of income for AY 2010-11 on 20.10.2010 showing a total income of Rs. 11,910/-. The appellant is seen to be engaged in the business of trading and investment. Admittedly, these are second stage proceedings as this order is in response to an order u/s 263 of the Income Tax Act, 1961 (in short the 'Act') dated 10.03.2014. In this case the bone of contention is regarding an amount of Rs. 35,24,30,000/- which has been shown as an aggregate of paid-up share capital and share premium thereon. It is seen that the share capital has been subscribed by as many as I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. 42 entities who have collectively transacted to the tune of Rs. 35,24,30,000/- (impugned amount). The Assessing Officer (hereinafter referred to as ld. 'AO') has recorded that it was deemed fit to substantiate the identity and creditworthiness of the share subscribers and genuineness of the transactions thereon. Towards this end, the ld. AO issued summons to the directors of the assessee company. It is recorded in the ld. AO’s order that the assessee was asked to produce the directors of the subscribing companies/investors to establish their identity and creditworthiness, along with the genuineness of the transactions. Admittedly, the ld. AO was following the directions contained in the order u/s 263 of the Act (supra). It is further recorded that instead of the Directors appearing and explaining the entries the assessee chose to submit a bunch of papers in support of his contention that the transactions in question were genuine. It is seen that this submission of documents did not satisfy the ld. AO and he insisted on production of the persons required in terms of summons issued u/s 131 of the Act. It has also been recorded in detail that most of the share subscribers are body corporates with very small amounts of figures shown as Profit After Tax (in short ‘PAT’). In fact, a perusal of the snapshot of details shows that only three of the share subscribers namely Unisys Softwares & Holding Industries Ltd., Prime Capital Market Ltd. and JMD Sounds Ltd. have shown PAT running in lakhs of rupees. All remaining 39 entities have shown PAT of less than Rs. 1 Lakh. Considering these facts, it has been recorded by the ld. AO as under: “All the investors have typical symptoms of Paper & Shell Entities- A. Large volumes of transaction; B. Ridiculously low income; C. Unverifiable addresses; D. No business activity worth the money; E. Dubious source of their own funds primarily as share capital and premium. F. No dividend is ever paid to the investors. Therefore, the circumstantial evidences in the form of analysis of Paper & Shell. Entities' financials and absence of assessee's rebuttals coupled with Page 2 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. typical symptoms of Paper & Shell Entities, as stated above, establish beyond doubt that all the transactions undertaken by way of introduction of share capital is nothing but a sham transactions.” 1.1. Before the ld. CIT(A) the assessee put forth a number of arguments and contended that the audited accounts, bank statements and other income tax related details of all the share subscribers were filed before the ld. AO and in light of this, there was no justification for making the assessee suffer the rigours of Section 68 of the Act. The ld. CIT(A) has relied on the fact finding done by the ld. AO and also on a number of authorities to come to the conclusion that the onus cast on the assessee was not discharged and hence, he was liable for the action u/s 68 of the Act. 1.2. Aggrieved with this action of ld. CIT(A) the appellant filed the present appeal and has ventilated his grievance through the following grounds of appeal:
1. For that the Ld. CIT(A), NFAC, Delhi has erred in law as well as on facts of the case by passing order u/s 250 of the I.T. Act, 1961 dated 10/02/2023 without paying any heed to the submission of the appellant and thereby dismissing the appeal filed by the appellant confirming the addition of Rs.35,24,30,000/- made by the Assessing Officer u/s. 68 of the I.T. Act, 1961 without appreciating the various judicial pronouncements completely analogues to this case. The Ld. CIT(A), NFAC had also erred in law by only relying on the judicial pronouncements cited by his honour but without showing any reasons why the same cited by the appellant are not acceptable to his honour and thereby the Ld. CIT(A), NFAC, had deliberately misused his power ignoring all documentary evidences just to punish the appellant.
2. For that the observations and contentions of the Ld. CIT(A), NFAC in dismissing the appeal filed by the appellant on the grounds which are not correct.
3. For that the appellant craves leave to adduce, modify, and/or alter the grounds at or before hearing.”
2. During the course of hearings, the appellant, through its director, has filed a detailed paper book running into 870 pages, along with written submissions, through letter dated 05.02.2024. At this stage, some of the major contentions, as evident from the written submissions of the appellant, deserve to be extracted: Page 3 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. “It is submitted that the assessee company issued 7,04,860 shares with the face value of Rs. 10/- per share along with a premium of Rs. 490/- per share to several companies. The assessee duly filed all the evidences of all the subscriber companies to prove the identity and creditworthiness of the subscriber companies and also prove the genuineness of the transactions which are enclosed as under in the paperbook. …………………………………………….. …………………………………………….. Thus, it is clear that the CIT(A) simply upheld the order of AO on the basis of some judgement of High Court and IT AT. Further, the assessee has discharged the initial onus that lay on it as it duly established the identity and creditworthiness of the share subscribers and genuineness of the transactions. It is submitted that the C1T in its order u/s 263 specifically directed the AO to examine the genuineness and source of share capital in respect of each and every shareholder “not through assessee”. However, the AO in the consequential proceedings issued summons to the assessee on 09-03-2015 wherein the assessee was specifically directed to produce the directors of the subscribing companies to substantiate identity and creditworthiness of die subscribers and genuineness of the transactions. This is also admitted by the AO himself in page 3 of the assessment order. This direction to the assessee and mode of enquiry was totally against the directions of the CIT which could not have been resorted to by the AO. The AO had ample powers vested under him under the provisions of the Income Tax Act to enforce the attendance of the shareholders. No verification worth name was made by the AO by issuing notices u/s 133(6) to the parties . No verification worth name was made by the AO by making necessary verification from the assessment records of the parties. It has been held in the case of Hon’ble jurisdictional High Court of Calcutta in the case of PCIT vs. Shree Leathers in ITAT/18/2022 (IA No. GA/02/2022) dated 14.07.2022 and Hon’ble Jurisdictional High Court of Calcutta in the case of CIT, Kolkata-Ill vs. Dataware Pvt. Ltd. ITAT No. 263 of 2011 dated 21.09.2011. Even otherwise, the personal appearance of the director of the assessee company has nothing do with the decree of proof for the purpose of section 68. The relevant evidences as stated above were filed. The companies were all Active Compliant companies as per MCA Master Data which are enclosed in the paper book. It is submitted that as per section 68, initial onus is upon the assessee to establish identity, capacity of the lender or the depositor and the genuineness of the transactions. The subscribers to the share capital are all identifiable persons. The PAN of all the shareholders, I.T.R. Acknowledgement, Certificate of Incorporation, copy of bank statement,
Page 4 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. profit and loss account and balance sheet, source, memorandum and articles of association, Master Data, Share Application and allotment advice were duly submitted. Therefore, identity of the shareholders has been established beyond all reasonable doubts. The genuineness of the transaction can also be safely concluded since the entire transaction has been done through the banking channels duly recorded in the books of accounts of the assessee and duly reflected in the financial statements of the share applicant which were submitted. In the bank statement furnished by the assessee, the transactions relating to the allotment of shares are duly reflected. The initial onus to prove the receipt of the share capital u/s 68 was therefore discharged. The department has not brought in record any evidence to prove to the contrary and shift back the onus on the assessee. The CIT(A) has not even made further enquiry by sending the matter to AO so that necessary enquiry can be made from the assessment records of the shareholders. Even otherwise, appearance of directors is not at all required under the law if all relevant document to prove the capital were submitted and nothing has been brought on record to controvert the same. It is submitted that section 68 nowhere speaks of production of the creditor for acceptance of the cash credit. It only requires that the assessee has to prove the nature and source of the credit. The assessee has proved that the amount was received towards the share application, there was no legal obligation on the assessee to present itself physically before the AO and the same cannot be a ground for making addition u/s 68 before the AO as has been held by the ITAT in the case of Devendra Kumar Sant.” 2.1. The ld. D/R also chose to respond to this paper book through written submissions filed on 14.04.2024. Some critical portions from these written submissions deserve to be extracted for record and reference:
“During the year under consideration, appellant received an amount of ₹35,24,30,000/- in the form of share capital along with premium. The AO issued summons u/s 131 to the directors of the appellant company. The appellant was also required to produce the directors of share subscriber/investor companies for examination to verify the identity, creditworthiness and genuineness of the transactions. However, neither the directors of the appellant company appeared nor the directors of share subscriber/investor companies were produced for examination. Further, the AO analysed the financials of the share subscriber/investor companies on pages 3 to 8 of the order. The AO observed that these companies were in the nature of paper/shell companies as they were having no business activities and their taxable income were substantially low. The AO also observed that huge share premium reserves in these companies were not commensurate with their business activity/profitability. The AO also held that mere production of PAN/related details and payment by cheques do not render a Page 5 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. transaction genuine. The AO finally concluded that non-appearance of directors of share subscriber/investor companies and weak financials of these companies make it clear that the identity and creditworthiness of the share subscribers and genuineness of the transactions could not be established as per the requirement of section 68 of the Act. Accordingly, considering the above facts, surrounding circumstances, human conduct and preponderance of probability, AO held that the assessee is the ultimate beneficiary and it introduced its own unaccounted fund in the garb of introduction of share capital/premium. He treated the share capital/premium as unexplained cash credit u/s 68 and added ₹35,24,30,000/- to the taxable income of the appellant. In course of appeal before the Ld. CIT(A), the assessee contended that the introduction of share capital/premium of ₹35,24,30,000/- during the year was well supported by the sufficient documents and corroborative evidences and, therefore, the burden of establishing the identity, creditworthiness and genuineness of the transaction has been discharged. However, the appellant failed to explain the reason for non-appearance of its own directors and non-production of directors of share subscriber/investor companies. On analysis of the financial the information, the Assessing Officer had found that the share subscriber/investor companies were in the nature of shell/paper companies and had no creditworthiness. During the appellate proceedings, no further documentary evidences, whatsoever, were produced to prove the creditworthiness of subscriber/investor companies and genuineness of the transactions. Written submission, primarily on legal grounds was submitted. The appellant failed to submit any explanation on the issue of creditworthiness of share subscriber/investor companies. Only accepting the payments through banking channel and filing copy of PAN, ITR and bank statement etc. did not make the share capital/premium transaction genuine unless appellant brought certain evidences on record to prove the identity/creditworthiness of companies which made investment and the genuineness of the transactions. The CIT(A) inferred that the identity of the investor companies could not be established as despite providing opportunities by the AO, neither directors of the appellant company nor the directors of the investor companies appeared to own the transactions related to investment in appellant company. Further, creditworthiness and genuineness of the transactions of share subscriber/investor companies could not be established in view of their weak financials. In almost all cases, the companies had shown meagre/nil income or losses. This compounded with huge premium, accordingly, pointed to the fact that these companies lacked creditworthiness and were mere shell companies.
We have carefully considered the finding of ld. AO, ld. CIT(A) and have carefully gone through the detailed paper book with the help of ld. D/R. Right at the outset, it is evident that for reasons best known to the appellant he chose not to comply with the summons issued by the ld. AO, in letter and Page 6 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. spirit. Thus, while it is seen that the ld. AO wanted the directors and responsible people to be present but the appellant kept on insisting that the voluminous documents filed should be sufficient to discharge his onus for escaping the provisions of Section 68 of the Act. In light of this, the issue that deserves to be decided is whether it can be said that the onus was discharged by the appellant or not. At this stage, it deserves to be mentioned that barring 3 of the share applicants the remaining 39 have shown negligible amounts as PAT. It has also been pointed out that at page 63 of the paper book, the profit and loss account of the appellant paints a relatively grim picture about the financial health. For this purpose, the barely legible page deserves to be extracted to show that for the year under consideration the total receipts from trading and interest amount to Rs 1,34,760/- only.
Page 7 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. 3.1. The factual matrix of this case reveals that not only is the appellant having a poor track record of income but even majority of share applicants are also corporate entities having meagre profits. In such a situation, the ld. AO’s action have to be held as justified in as much as the creditworthiness of the share applicants and the genuineness of the transaction needed to be proved through better evidence than merely filing the documents as have been mentioned time and time again by the appellant. In principle the action of ld. AO is justified and upheld. 3.2. For arriving at this conclusion against the Appellant, we draw considerable strength from the findings of the Coordinate Bench of the ITAT, Kolkata in M/s. Nexcare Agency Pvt. Ltd. vs. ITO in order dated 26.07.2024 where, like in this case a corporate entity of poor profitability attracted substantial premiums on the face value of individual shares. Some portions deserve to be extracted for reference: “4. The Ld. D/R relied on the order of ld. CIT(A) and the ld. AO and stated that abnormally high share premium in closely held companies, with no clear-cut profitability to justify such high premiums, would need to prove the identity, creditworthiness and genuineness of the entities advancing such sums of monies.
5. On a careful consideration of the totality of facts and circumstances, as also the averments of the assessee and ld. D/R it is clear that once proceedings u/s 263 of the Act were initiated then the assessee was put on notice regarding his duty to prove the transaction which involved very substantial amounts as share premium. It is not understood how a closely held company which has minimal commercial activity as is evidenced by the profit and loss account filed with the paper book as under:
Page 8 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. 5.1. The profit and loss account filed by the assessee paints a grim picture about the qualitative aspect of commercial activity which does not seem to justify a premium of Rs. 490/- on a share with face value of Rs. 10/-. Considering this fact, it would be all the more prudent to examine the genuineness etc. of the 11 concerns which chose to repose considerable faith in the commercial future of the assessee to trust them with huge sums of money. It was on somewhat similar situation when the Hon'ble Jurisdictional High Court upheld the doubtful nature of share premium monies being given to companies having doubtful commercial credentials in the case of PCIT vs. BST Infratech Ltd. reported in [2024] 161 taxmann.com 668 (Calcutta). 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 which is 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 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.
Page 9 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd.
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.” 5.2. We also draw considerable strength 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 have taken place through normal banking channels, etc. in this case, the Hon'ble Apex Court has dealt with the issue from legal perspective and sum 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] 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.
Page 10 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. 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 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
Page 11 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. was justified in adding back the amounts to the assessee's income. [Para 15]” 5.3. 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] 162taxmann.com465 (Calcutta) has held that action u/s 68 of the Act was justified.
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 in terms of monies as share premium when the financial aspects of the recipient company would not merit such investments under any kind of prudent consideration. In the present case while 4 out of 11 share applicants were not traceable on e-mail addresses and one more did not respond to the summons, it is evident that even those share applicants who did file certain documents, were not sufficient in the eyes of law to discharge the burden cast on the assessee regarding proving the genuineness of the transaction. 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 11 entities to transfer huge sums of money by way of share premium. 6.1. Considering the case laws cited (supra) the financial health of the assessee and the inadequate discharge of onus, we hold this case to be a fit case for application of Section 68 of the Act and thereby confirm the impugned addition. 3.3. It is seen that at some stage the Appellant has averred that this case needs to be treated differently as it predates the amendment to section 68 of the Act. To discuss this issue, it may be worthwhile to rely on another case involving similar facts, whereby again a company of limited profitability was able to attract very high premiums on individual shares, it has been held that action u/s 68 of the Act was justified. This case is of ITO vs. M/s. Jagdamba Financial Management Pvt. Ltd. in order dated 10.07.2024. In this case, it has been discussed also that the amendment to Section 68 of the Act brought in by the Finance Act, 2012 was merely clarificatory and only codified the position of law laid down by the Hon'ble Apex Court and Hon'ble High Courts in the past. The relevant portions from the said order deserve to be extracted:
2.2. At this stage, it may be worthwhile to recapitulate the subject matter and findings in certain important case laws as under, which will have a bearing on the outcome: Page 12 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. a) In the case of PCIT vs. NRA Iron & Steel (P.) Ltd. reported in [2019] 412 ITR 161 (SC) the Lordships of the Hon'ble Apex Court have held that when the assessee had received share capital/premium and there was a failure to establish creditworthiness of the investor companies, the AO was justified in passing assessment order making additions u/s 68 of the Act even when the assessee had filed confirmations from investor companies to show that the entire amounts had been paid through normal banking channels. b) In the case of Neelkantha Commosales (P.) Ltd. vs. ITO reported in [2022] 286 Taxman 48 (Calcutta), the Lordships of the Hon'ble Calcutta High Court have held that even under non-amended provisions of Section 68 of the Act, that is prior to insertion of proviso to Section 68 of the Act by the Finance Act, 2012, an Income Tax Officer was not precluded from making an enquiry about the true nature and source of any sum found credited in books of the assessee, even if same was credited as receipt of share application money. c) In the case of Bal Gopal Merchants (P.) Ltd. vs. PCIT reported in [2024] 162 taxmann.com 465 (Calcutta), the Lordships of the Hon'ble Calcutta High Court have held that when the assessee had received a huge amount as share application money, along with premium and the summons issued by the AO for the directors of the assessee company were not complied with then on the basis of the fact that there was no noticeable business activity by the company, high share premium was not justified and addition made u/s 68 of the Act was upheld. d) In the recent case of PCIT vs. BST Infratech Ltd. reported in [2024] 161 taxmann.com 668 (Calcutta) vide order dated 23.04.2024 the Lordships of Hon'ble Calcutta High Court have held that the mere fact that transactions were through banking channels or that investor companies were income tax assessees or registered with the Registrar of Companies could in no manner be sufficient to discharge the onus u/s 68 of the Act. Considering the relevance of this case law for the matter at hand, it would be in the fitness of things to extract the relevant portions from this judgement: “26. We also take note of the Finance Bill, 2012 which brought about certain amendments to the Act with effect from the assessment year 2013-2014 wherein under the heading Measures to Prevent Generation and Circulation of Unaccounted Money" it was pointed out that the onus of satisfactory explaining such credit remains on the person in whose books such sum is credited. If such person fails to offer an explanation or the explanation is found to be satisfactory (sic) then the sum is added to the total income of the person. That certain judicial pronouncements have created doubts about the onus of proof and the requirements of Section 68, particularly in cases where sum is credited as share capital, share premium etc. That courts have drawn a distinction and emphasised that in case of private placement of shares the legal regime should be different from that which is followed in case of a company seeking share capital from the public at large. In the case of closely held companies, investments are made by a known person; therefore, a Page 13 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. higher onus is required to be placed on such companies besides the general onus to establish, identity and creditworthiness of the creditors and genuineness of the transaction. This additional onus needs to be placed on such companies to also prove the source of money in the hands of such shareholders or person making payments towards issue of shares before such sum is accepted as genuine credit. If the company fails to discharge the additional onus, the sum shall be treated as income of the company and added to its income. Therefore, it was proposed to amend Section 68 of the Act to provide the nature and onus of any sum credited, as share capital premium etc. in the books of a closely held company shall be treated as explained only if the source of fund is also explained by the assessee company in the hands of the resident shareholders. However, even in the case of closely held companies, it is proposed that this additional onus of satisfactorily explaining the source in the hands of the shareholder, could not apply if the shareholder is a well regulated entity namely a Venture Capital Fund, a Venture Capital Company registered with SEBI.
It is no doubt true that this amendment which was made to Section 68 applies in relation to the assessment year 2013-2014 and the subsequent years and it has been argued that the said amendment will not apply to the assessee's case as the case concerns the assessment year 2012-2013. Though this may be true, as pointed out in Yada Hari Dalmia, Section 68 as it stood prior to the earlier amendment only codified the law as it existed before 01.04.1962 and did not introduce any new principle or rule and when Section 68 was inserted in the 1961 Act it only provided a statutory recognition to a principle which had been clearly adumbrated in judicial decisions. Therefore, it was held that ratio laid down in the earlier judgments of the Hon'ble Supreme Court is equally applicable to the interpretation of Section 68 of the 1961 Act. Thus, we can very well refer to the objects behind amendment to Section 68 by Finance Bill, 2012 which has taken note of various decision of the court where the courts have drawn a distinction and emphasised that in case of private placement of shares the legal regime should be different from that which is followed in the case of a company seeking share capital from the public at large. (emphasis added) …………………………………. ………………………………….
The tribunal fell in error in holding that the CIT(A) has not pointed out any doubt or discrepancy with regard to the identity of the investors. The learned tribunal has posed a wrong question which has led to a wrong answer. The question is not whether the identity of the investor has to be established but the question was whether the investor had requisite creditworthiness and whether such creditworthiness was a make belief situation by means of a circular transaction and if the same had been established. The learned tribunal has held that the findings rendered by the CIT(A) that the assets in the form of investments have been created through Page 14 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. rotating of money in between the group companies and the assets mainly consists of cash and cash equivalents are not enough to prove that any unaccounted money of the assessee has been introduced in the assessee company warranting addition under Section 68 of the Act. This finding in our opinion upon consideration of the facts is perverse. ………………………………….
We have noted that the tribunal has made certain observations as regards the future prospects of the assessee company as they are a steel industry and that their fixed assets and also the turnover had increased substantially. However, this appears to have not been the submission when the assessee filed an appeal before the CIT(A) challenging the addition made by the assessing officer. This is evident from the grounds of appeal
which have been set out in the order passed by the CIT(A) in paragraph 2.1 of the order dated 28.11.2019. The finding rendered by the tribunal is probably taken from the written submissions made by the assessee before the tribunal giving certain facts and figures regarding the expanding of business activities of the assessee. The assessee in their submission contended that their business activity has increased considerably and for the purpose of expansion funds were required and therefore the assessee raised funds from various means, increment in share capital from associates being one of them. The fact clearly demonstrates that the source of the funds which have flown into the account of the assessee have substantially come from one company namely Gainwell Textrade Private Limited and the said company had contributed to the other companies and the funds transferred to those companies were transferred to the assessee company invariably on the same day leaving a bank balance which was almost negligible and the bank statements reveal that the prior to the inflow of the funds into those investing companies, the bank balance was negligible and after the transfer it was also negligible. The assessee had contended before the tribunal that the amount was credited through proper banking channels and the investing companies are body corporate registered with the Registrar of Companies and individually assessed to income tax and therefore the genuineness of the parties is beyond doubt. However, this is not the litmus test to discharge the burden on the assessee to establish creditworthiness of the investing companies as well as the genuineness of the transaction. Thus, we have no hesitation to hold that the explanation offered by the assessee is neither proper, reasonable or acceptable.
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 Page 15 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. 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 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.” 2.3. It is seen that the issue of applicability of the principles of the amended provisions u/s 68 of the Act would apply to the present case, since as discussed in para 27 of the BST Infratech case (supra), the said amendments merely codified the position of law as earlier expounded in various case laws. This position deserves to be clarified as it is seen that before the ld. CIT(A) this applicant had claimed that he deserves relief due to his case pre-dating the said amendment. To stress the retrospective nature of the provisions, we also rely on two cases of Hon'ble ITAT, Kolkata from which relevant portions are extracted for reference:— i) M/s. Subhlakshmi Vanijya Pvt. Ltd. vs. CIT-I, Kolkata in order dated 30/07/2015: “13.ae. The about discussed judgments from the Hon’ble Supreme Court holding a clarificatory substantive provision as retrospective, despite the same being made applicable from a particular year, fully govern the position under consideration. It is interesting to note that the judgment of the Hon’ble jurisdictional High Court in Maithan International (supra) holding that the burden of proving the credit of share capital etc. is on a closely held company and failure to do so attracts the rigor of section 68, has been delivered on 21.1.2015, much after the amendment carried out by the Finance Act, 2012. This case pertains to preamendment era as the order of the tribunal assailed in this case is dated 24.6.2011. It shows that the Hon’ble High Court has also impliedly approved the proposition that the position anterior to the A.Y. 2013-14 was the same inasmuch as the onus to prove the share capital by a closely held company was on it. We, therefore, hold that the amendment to section 68 by insertion of proviso is clarificatory and hence retrospective. Page 16 of 18 I.T.A. No.: 230/KOL/2023 Assessment Year: 2010-11 Grafton Merchant Pvt. Ltd. The contrary arguments advanced by the ld. AR, being devoid of any merit, are hereby jettisoned.” ii) M/s. Classic Flour & Food Processing Pvt. Ltd. vs. C.I.T. in order dated 05/04/2017: “22. As to whether enquiry into high share premium ought to have been made by the AO and also as to what was the justification for such high premium could to be investigated by the AO at all because the 1st proviso to Sec.68 of the Act inserted by the Finance Act, 2012 w.e.f. 1-4.2013 was only prospective in operation, we are of the view that since section 68 covers `any sum credited' in the books without any exception, which, inter alia, includes share capital, it cannot be held that the examination of share capital with premium etc. was earlier outside the ambit of section 68 and now this amendment has brought it into its purview. The amendment has simply made express which was earlier implied. We are therefore of the view that the assessee is always obliged to prove the receipt of share capital with premium etc. to the satisfaction of the AO, failure of which calls for addition u/s 68 of the Act.”
4. Considering the discussions made above and the cases relied upon, the assessee’s appeal on the substantive ground of the addition of Rs. 35,24,30,000/- is dismissed. The remaining grounds are general in nature, needing no specific adjudication.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the open Court on 21st August, 2024.