Judicial Scrutiny of Share Application Transactions under Section 68: A Comprehensive Legal Analysis
Brief Discussion of the Case (Hon'ble Calcutta High Court) **- The Assessee filed its return of income for the Assessment Year 2012-13 declaring income of Rs. 20,555,090/-.
- The Assessing Officer added the entire share application/allotment money under Section 68 of the Income Tax Act as undisclosed cash credit due to non-compliance with a notice issued under Section 131 of the Act.
- The CIT(A) conducted a fact-finding exercise and concluded that the transactions were not genuine, leading to the dismissal of the Assessee's appeal.
- The tribunal, on appeal, found that the assessee had proved the identity of the share subscribers and deleted the addition made under Section 68 of the Act./li>
- The revenue raised substantial questions of law regarding the tribunal's decision, questioning the genuineness of the transactions and creditworthiness of the investor.
- The Hon'ble Court emphasized the assessing officer's role as both an investigator and adjudicator, requiring examination and verification of facts presented by the assessee.
- The CIT(A) analyzed the pattern of transactions in the bank accounts of investor companies and held that the transactions were stage-managed, leading to the conclusion of non-genuineness.
- The tribunal erred in holding that the CIT(A) did not raise doubts about the identity of the investors, leading to the restoration of the CIT(A)'s order in favor of the revenue.
Issues discussed:
- Whether the addition of share application money under Section 68 of the Act was justified based on the genuineness of transactions and creditworthiness of the investor.
- Whether the tribunal's decision to delete the addition under Section 68 was erroneous in law.
Decision:
The tribunal's decision to delete the addition under Section 68 of the Act was set aside, and the CIT(A)'s order was restored in favor of the revenue.
Reasoning / Observations:
It was observed by Hon’ble Calcutta High Court that a substantial portion of funds infused/invested was originated from M/s Gainwell Textrade Private Limited (one of the investor), which also funneled money to other companies, with those funds eventually reaching the Assessee, typically on the same day. This rapid movement of funds resulted in minimal residual balances in the bank accounts of these investing companies both before and after the transfers.
While the Assessee argued that these transactions were conducted through proper banking channels and involved entities that were corporately recognized and tax-compliant, these claims do not adequately satisfy the burden of proof required to demonstrate the creditworthiness of the investing companies or the genuineness of the transactions. Therefore, it was concluded that the explanations provided by the Assessee, concerning the sources and legitimacy of the funds, do not meet the necessary standards of appropriateness, reasonableness, or acceptability.
Consequently, it was held that the CIT(A) properly engaged in a thorough and logical analysis, meticulously evaluating the totality of the facts and circumstances pertinent to the allegations against the Assessee. This approach considered all relevant immediate and closely related facts, enabling the CIT(A) to draw a reasonable and prudent conclusion. Based on the evidence, it is evident that the Assessee failed to demonstrate the investors' ability to justifiably invest such high premiums for the shares. The purported creditworthiness of these investor companies remains highly dubious, and the explanations provided by the Assessee are insufficient to clarify the origins of the funds involved.
The transaction lacks the necessary evidence to be deemed genuine, and the mere identification of the investors does not suffice to meet the legal burden of proving either their financial capacity or the legitimacy of their transactions. Thus, the investment into the Assessee's share capital cannot be recognized as authentic based purely on the identities involved.
**Principal Commissioner of Income-tax vs BST Infratech Ltd [2024] 161 taxmann.com 668 (Calcutta) pronounced on 23-04-2024
#Creditworthiness and Genuineness of Transactions
#Legal Analysis of Investment Transactions