The Calcutta High Court has upheld the order of the Income Tax Appellate Tribunal (ITAT) deleting additions made under Section 68 of the Income Tax Act, 1961, relating to alleged unexplained share capital, after finding that the assessee had duly established the identity, creditworthiness, and genuineness of the share subscribers. The Court ruled that a mere theory of “routine entries” or “paper companies” was insufficient to justify additions in the absence of any specific discrepancies in the financial records of the investors.
The Division Bench comprising Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das) took note of an important factor that the matter pertains to the financial year 2007-08, and the proceedings were initiated after a gap of 13/14 years. Thus, the predicament faced by the respondent was rightly taken note of by the ITAT, and it was observed that it is practically difficult for the respondent to call the share subscribers who had invested long back. The Bench therefore emphasized that there is every possibility that the shareholders would have sold their equities and new shareholders would have taken their place in the meantime.
In this case, the respondent company floated 6,97,000 equity shares at a premium price, and the return filed by it was accepted by the AO during the original assessment. However, later on, based on the directions issued by the Commissioner u/s 263, the AO reopened the assessment and asked the respondent to explain the nature and source of the alleged sum. In response, the respondent established the identity and creditworthiness of the shareholders and the genuineness of the transactions by producing copies of the confirmation letters, bank statements, and audited financial statements during the scrutiny proceedings. Ignoring all these, the AO made additions u/s 68 in the reassessment proceedings. Challenging the same, the respondent approached the ITAT, where the additions stood deleted.
When the matter reached the High Court, it was noted that the respondent had produced all the documents before the AO not once but twice, and the authority, except for indicating a theory of routine entries of paper companies/shell companies, failed to point out any discrepancies in the financials of the alleged cash creditors. Furthermore, the Court found that all the share subscribers are private limited companies duly registered with the Ministry of Corporate Affairs and have been furnishing the audited financial statements in the portal of the Ministry. The Court therefore deleted the additions u/s 68 and answered the issue in favour of the respondent.
Appearances:
Advocate Prithu Dudhoria, for the Appellant