Investment Made From Share Premium Without Any Noticeable Business Activity, Legitimacy Of Income Not Established: Calcutta High Court

The Calcutta High Court has held that the source of investments by those two companies is also the share capital and share premium raised by them while issuing their own shares to other closely held companies, and those companies had no noticeable business activities.

The bench of Chief Justice T.S. Sivagnanam and Justice Hiranmay Bhattacharyya, while upholding the ITAT's order, noted that the effects of the documents were considered by the tribunal, and it was not satisfied with the genuineness of the transaction. More importantly, the assessee itself claimed that there was no noticeable business activity during the year. Thus, the tribunal ultimately concluded that the assessee has failed to establish the basic ingredients required to be established under Section 68.

Section 68 aims to ensure individuals and corporations transparently disclose their income by addressing unexplained cash credits in their books of accounts, placing the responsibility on the taxpayer to prove the legitimacy of such credits.

The assessee filed the return of income, disclosing a total income of NIL. The case was selected for scrutiny, and notices under Sections 143(2) and 142(1) were issued and served on the assessee. In response to the notice, the authorised representative of the assessee appeared and filed the details as called for. The assessing officer noted that the business of the assessee is only an investment, and during the previous year, the assessee had received a huge share of application money along with the premium.

Summons under Section 131 were served on the directors of the assessee, calling upon them to produce proof of identity (Pan Card) and a list of companies where the director was a director or shareholder from the assessment year 2008–2009.

The assessing officer records that there were no complaints from the directors of the assessee company in response to the summons issued under Section 131. Therefore, the identity, genuineness, and creditworthiness of the share applicant companies were not established because the primary issue regarding the due diligence done, the steps taken for protection of the funds, and most importantly, the reason for investment in a company with no track record and a huge premium was not clarified. Since the assessee did not furnish the details of the shareholders, the identity of the shareholders was questionable.

The assessing officer observed that, in the light of the preponderance of probability and normal human behavior, it may be easily inferred that the entire transaction lacks substance. The assessee company has been recently incorporated without any proven track record and does not in any way justify the high share premium. Further, the assessing officer holds that the facts of the case clearly reveal that the receipt of share application money is only a façade for the conversion of unaccounted money, and the non-appearance of the directors only strengthens this point. .

The assessee failed to produce the directors or employees of the share applicants, and the addition is required to be made under Section 68 of the Act. The assessing officer thus completed the assessment under Section 143(3), holding that the amount of share application money received along with the premium that remained unexplained is to be added back under Section 68.

The assessee filed an appeal before the CIT (A), contending that the order passed by the assessing officer was erroneous, which was dismissed by the CIT (A).

The assessee preferred appeal to the tribunal.

The assessee contended that the transactions were through banking channels and the assessing officer should have verified the same to examine the genuineness, the investment of the assessee company was in land and at the time of transaction and in view of huge quantity of land, the cost of the land was very low but after development of the same the sale price would be highly profitable. The assessee contended that the assessee is presently having the investment activities in land and it is reporting loss because it is the first year of the company and no activities have been noted. The assessee company was valuing investments at book value whereas, the intrinsic or fair market value is much more and while issuing shares, fair market value of the asset has to be taken into account and the person paid the premium has factually benefited from the purchase of shares at premium. With the above submissions, the assessee sought for setting aside the order passed by the CIT(A).

The tribunal rejected the contentions of the assessee by appreciating the factual position.

The court stated that the law on the subject is fairly well settled, the assessee as to the burden of proof would include the proof of identity of the investor, the capacity of the investors to advance the money and the genuineness of the transaction. The assessee has to prove these three factors by producing acceptable evidence and only then the onus shifts on the department.

The court noted that there has been non-compliance of the summons issued under Section 131 of the Income Tax Act.

The court examined the financials of the two share subscribing companies and found that the source of investments by those two companies are also from the share capital and share premium raised by them while issuing their own shares to other closely held companies and those companies had no noticeable business activities. Therefore, the no substantial question of law arises for consideration in the appeal.

Counsel For Petitioner: J.P. Khaitan

Counsel For Respondent: Om Narayan Rai

Case Title: Balgopal Merchants Private Limited Versus The Principal Commissioner Of Income Tax -2, Kolkata

Case No.: ITAT/232/2023

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