Equal Amount Of Investment In Equity Of Other Entity Was Made Against Credits In Form Of Share Capital & Premium: Kolkata ITAT Justifies Addition U/s 68

Section 68 of the Income Tax Act, 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 Bench of the ITAT comprising of Anikesh Banerjee (Judicial Member) and Dr. Manish Borad (Accountant Member) observed that “finding of the CIT(A) is only to the extent of fund not received in cash form during the year. Neither any details have been filed by the assessee nor there is any specific finding of the CIT(A) dealing with the evidence filed by the assessee to explain the nature and source of alleged sum. We also note that against the alleged credits in form of share capital and share premium, an equal amount of investment in equity of other entity has been made but there is no explanation about the said transactions.” (Para 9)

Facts of the case:

During scrutiny assessment, the AO observed that assessee has received share capital of Rs.1,35,000/- and share premium of Rs.3,49,65,000/-. The assessee was asked to explain the source of alleged sum. Since summons u/s 131 to the Director was not complied with, the AO was not able to examine the identity, creditworthiness of the share subscribers and genuineness of the transactions. Observing that no regular business was carried out during the year and even in the subsequent years the turnover was Nil, the AO did not find any merit in the claim of share capital and share premium and both were added in the hands of assessee. On appeal, the CIT(A) deleted the addition u/s 68 after finding lack of receipt of cash for issue of shares.

Observations of Tribunal:

The Bench noted that the CIT(A) has deleted the addition by observing that no cash has been received during the year.

The Bench observed that the assessee is a private limited company and has to maintain its books of accounts on mercantile basis.

In the system of mercantile system of accounting, the Bench explained that the entries can be through cash book, bank book and journal book, whereas under journal entries, fresh credits can be received during the year and there is no requirement of any receipt through banking/cash mode.

The Bench observed that once it is not specifically provided that sum should be received only through banking channels and the mention is only about the credit entry, then it entails into all the credit entries and the AO is well within his jurisdiction to examine the same.

At the same time, it is incumbent upon the assessee to explain the nature & source of the transactions to the satisfaction of the AO, added the Bench.

Therefore, on finding no merit in the findings of the CIT(A), the ITAT confirmed the addition and allowed the Revenue's appeal.

Counsel for Appellant/Revenue: Kiran Chatrapoty

Case Title: ITO verses Mangalvani Commercial Pvt. Ltd.

Case Number: I.T.A. No. 785/Kol/2019

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