Assessee Proved Creditworthiness Of Loan Transactions: ITAT Deletes Addition

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has deleted the addition as the assessee proved the creditworthiness of loan transactions.

The two-member bench of Sanjay Garg (Judicial Member) and Rajesh Kumar (Accountant Member) has observed that where all the evidence were filed by the assessee proving the identity and creditworthiness of the loan transactions, the fact that summons issued were returned unserved or no one complied with them is of little significance to prove the genuineness of the transactions and the identity and creditworthiness of the creditors.

The case of the assessee/respondent was selected for scrutiny under CASS, and statutory notices were duly issued and served upon the assessee. The return of income was duly filed, declaring total income. The company was incorporated on December 20, 2005, and in FY 2011–12, it issued equity shares to various private limited companies at a high premium.

The AO called upon the assessee to furnish various details, evidence, and information, which were duly furnished by the assessee pertaining to an increase in share capital; however, summons issued under Section 131 remained uncompiled.

The summons issued to the directors of investing companies and share allottee companies also remained non-compiled; however, investor companies had furnished all the details before the AO. The AO added the entire share capital and share premium to the income of the assessee on the ground that genuineness and creditworthiness were not proved.

In the appellate proceedings, CIT(A) allowed the appeal of the assessee by holding that the assessee has proved the genuineness of transactions and creditworthiness of the investors.

The department contended that the order passed by the CIT(A) was wrong and against the principles of natural justice, as the CIT(A) has admitted the new evidence that was not before the AO. The issue of share capital and share premium was decided on the basis of the evidence without calling for a remand report on the new evidence. The summons was issued to the directors of the investor companies, which remained non-complied. The department admitted that the evidence as regards the share capital and share premium was furnished before the AO.

The respondent contended that it was not a case of a shell company as the company is in the business of dealing in iron and steel. The only objection raised by the AO was that the shares were issued at a very high premium without any justification. It was not the case of the AO that the investor companies did not furnish the necessary evidence as called for; the only objection was that the summons issued to the directors of the investor companies was not complied with. The appellate order was passed after a detailed analysis and examination of all the evidence and factual findings of facts have been recorded by the CIT(A) to the effect that the genuineness of the transactions and creditworthiness of the parties were fully proved.

The ITAT held that the AO had made the addition merely on the ground that the shares were issued at a very high premium without any justification.

"In our opinion, the issue of shares at a high premium is a business decision by the board of directors of the company, which cannot be questioned in the instant year at least as there is no provision in the Income Tax Act," the ITAT said.

Case Title: ITO Versus M/s KDG Projects Pvt. Ltd.

Citation: I.T.A. No. 711/Kol/2019

Date: 02.11.2022

Counsel For Appellant: Manish Tiwari

Counsel For Respondent: Ranu Biswas

Click Here To Read Order