Assessee Has Not Benefited From Round-Tripping Of Share Transactions; Mumbai ITAT Deletes Addition U/s 68

The Bench of the ITAT comprising of Narendra Kumar Choudhry (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that “As per the record of ROC the assessee has issued share capital and assessee also brought on record that all these companies are in existence and in the books of the assessee the assessee has declared its capital liability in its financial statements. This clearly shows that the transaction of issue of share application money is genuine. Nothing is brought on record by the tax authorities that assessee has involved in any manipulation transaction or cash transactions which suggest that assessee has attained any directly or indirect benefit out of this transaction.” (Para 24)

As per the brief facts of the case, the Assessee filed its return of income on 29.09.2008 declaring a total income at ₹.10,19,760/- and subsequently the assessee revised its return of income on 30.09.2008 declaring total income at ₹.2,020/-. Subsequently, the case was reopened u/s 147 based on the information received from the office of DGIT (Investigation), for accommodation entry received by the assessee during the year under consideration from various concerns operated by a group. Notices u/s 148 were issued and served on the assessee and procedures specified for re-assessment proceedings were duly completed by the AO. The main reasons recorded for the reopening of the assessment are three companies controlled by the same person and indulged in providing accommodation entries. These three companies have paid share application money to the assessee ₹.10,00,000/- each during the current assessment year.

Subsequently, further notices u/s 142(1) were issued to the assessee. During assessment proceedings, AO observed from the Balance Sheet of the assessee that the assessee had issued 995000 shares of ₹.10/- each, and out of the above shares 20000 shares were allotted to signatories of the company. After analyzing the financials of the companies, AO observed that all three companies no doubt have declared turnover and also have huge creditors outstanding, booked marginal expenses and returned income is comparatively less. After because none of the parties appeared before him, he concluded that the assessee as well as the alleged investors failed to prove the creditworthiness and genuineness of the transaction. Since the assessee has failed to explain the nature of the source of the sum credited in the share application, money was treated as unexplained cash credits in the books of the assessee and accordingly, treated as unexplained cash credit u/s 68. Hence, the AO made an addition u/s 68.

The CIT(A) also sustained the findings of the AO in his order and confirmed the addition made u/s 68.

The Bench noted that the assessee has only issued share application money to the extent of the face value of shares and there is no involvement of any receipt of share premium in this case for which the assessee has submitted all the relevant documentation substantiating the identity.

The Bench observed that from the Balance Sheet, it is noticed that the available funds in the business suggest that investors can make investments in shares issued by the assessee company. The investors don't need to have the earning capacity to substantiate the investments in the other companies. It is enough that they have enough funds at their disposal to make the investments. In this case, the investments were made only to the extent of face value.

The Bench further observed that merely because the investors were not brought before AO it does not negate the expenses of the investors. The assessee has submitted the confirmations from all these parties.

The Bench stated that the case was reopened based on alleged accommodation entries provided to various entities while observing that these three entities are connected to the same person. Since none responded or partly responded to the notices issued by the AO, the AO concluded that all these parties were bogus without further verification of the same he proceeded to make the addition.

The Bench highlighted that in the Balance Sheet of the assessee, it is still showing as share capital. It is not brought on record how it is merely an accommodation entry when the actual funds were received by the assessee through the bank.

Therefore, on finding the whole transaction of the issue of share capital as genuine, ITAT allowed the assessee's appeal.

Counsel for Appellant/Taxpayer: N.R. Agrawal

Counsel for Respondent/Department: Manoj Kumar Sinha

Case Title: Lalwani Estates & Realtors Pvt Ltd. Verses Income Tax Officer

Case Number: ITA NO.3370/MUM/2023

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