Assessee's Failure To Establish Genuineness Of Transaction With Cogent And Credible Evidence, Calcutta High Court Upholds Addition

The Calcutta High Court has held that merely proving the identity of the investors does not discharge the onus on the assessee if the capacity or credit worthiness has not been established.

The bench of Chief Justice T.S. Sivagnanam and Justice Hiranmay Bhattacharyya has observed that the assessee has not established the capacity of the investors to advance money for the purchase of the 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 respondent or assessee filed its return of income. The case was selected for scrutiny, and a notice was issued along with the questionnaire.

The assessing officer, while completing the assessment, noted that the assessee issued shares to five companies. The assessing officer stated that there is a rampant practice of introducing undisclosed income under the guise of share applications or share allotments to different companies or individuals. The companies took advantage of the corporate veil to channel the undisclosed income. To protect this practice, the Income Tax Act was amended with effect from April 1, 2012. The Assessing Officer referred to a letter dated January 23, 2015, which was served on the assessee, requesting them to produce the new shareholders as well as the directors before the Assessing Officer within 15 days to prove the genuineness and creditworthiness of their investment.

The assessing officer held that the assessee company entered into a share transaction with the investor to introduce the unaccounted income in the form of a share application or allocation. They did not have any regular business transactions or regular acquaintances with the investors. The investors had no reason to invest such a huge amount in the business of the assessee, and the entire transaction was done to circumvent the provisions of the Act. The entire share application/allotment money was added back under Section 68 as undisclosed cash credit. The assessee was informed that penalty proceedings under Section 271(1)(c) are being initiated separately.

The CIT (A) noted that the onus of establishing the identity, creditworthiness, and genuineness of the share transaction was not discharged by the assessee. It was held that the return of income filed by the assessee's shareholders shows that they did not have any real business activity and had never earned taxable income, yet they were dealing in crores of dollars in the name of investing and receiving funds towards share capital at an unreasonably high premium.

The assessee brought the matter on appeal to the tribunal. The assessee contended that all the share applicants are subject to income tax, and the entire share application money was received through proper banking channels, so the addition made by the assessing officer and confirmed by the CIT (A) was unjustified.

The tribunal held that the assessee is a steel industry. The future prospects of the assessee are great; they were in need of funds as they were expanding their operations, and at the given point in time, there was an increase in fixed assets. The turnover of the assessee increased by 73%, and the reason to invest also included strategic relations made by the associates or group companies having directors directly related to the assessee's directors.

The department contended that though the assessee might have established the identity and creditworthiness of the share applicants at the relevant time, the third and most important ingredient, namely the genuineness of the transaction, has to be established, and unless and until all three factors are jointly established, the revenue was fully justified in invoking Section 68.

The court noted that 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.

“We are convinced to hold that the assessee has not established the capacity of the investors to advance money 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 court said.

The court while ruling in favour of the department held that the assessee has miserably failed to establish the genuineness of the transaction with cogent and credible evidence and that the investments made in its share capital were genuine.

Counsel For Appellant: Om Narayan Rai

Counsel For Respondent: J.P. Khaitan

Case Title: The Principal Commissioner Of Income Tax, (Central) -2, Kolkata Versus M/S. BST Infratech Limited

Case No.: ITAT/67/2024

Click Here To Read The Order