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June 25, 2022

Section 68 addition is not permitted if the source of funds is not questioned by the AO

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Section 68 addition is not permitted if the source of funds is not questioned by the AO

Facts and issues of the case

The assessee filed its return of income on 30.09.2012 declaring total income(- ) ₹19,27,150/-. This is a company formed by IITian i.e. Mr. Puneet Kumar for developing gaming machines as a startup company along with founder of “Indiagames” Mr. Vishal Gondal i.e. Sweat & Blood Ventures Group. Out of 5000 shares, 4999 equity shares of ₹10/-and one equity share of ₹10/- each were allotted and fully paid to M/s Sweat    & Blood  Ventures Group and Mr. respectively. Thereafter, in view of the prospectus Puneet Kumar of entering intodesigning and manufacturing arcade gaming machines, the assessee company valued its shares at ₹1080.84 as on 31.03.2011The Assessing Officer during scrutiny proceedings asked the assessee to justify the premium charged during the year. According to the Assessing Off cer, the assessee-company was a loss making company from the very first year of the operation and such a huge premium was unscientific and unjustified. The Assessing Officer further observed that the share premium collected was parked in the time deposits and  was not utilized  for business purpose and objects of the share premium received. The Assessing Officer was of the view that accumulated profits of the assessee-company were brought back in the price of the share premium, therefore, in view of the provision of section 68 of the Income Tax Act, 1961 (in short ‘the Act’), he treated the entire value of the share along with share premium of ₹1,99,99,816/- as unexplained cash credit u/s 68 of the Act.On further appeal,        the Ld.  CIT(A) deleted  the addition observing that the Assessing Officer has not disputed the source of the funds and only premium.

Observation by the court

Court had heard rival submissions of the parties and perused the relevant material on record. Court found that the considering the submissions of the assessee and Ld. CIT(A) after perusal of the assessment order deleted the additions observing as under:

 During the course of appellate proceedings, it has  been the submission of the assessee that the assessee Company was formed by IITians, Mr. Puneet Kumar and Mr. Vaibhay Goel. The assesse company diluted 28% of stake of company for Rs. 200 lakhs to Non- resident companies. The inward remittance of share capital was reported to the Reserve Bank of India in the appropriate forms. This being first venture of the technocrats / promoters, the question of accumulated black money being brought back to India, does not arise. The money was parked in ICICI bank till the same was utilised towards business and later on the same was used for the business purpose only. It was also submitted by the assessee that in the initial years all start up companies incur heavy losses and the same is funded by investors with issue of shares at premium. In this regard the assessee has cited the examples of some startups like the Ola cabs company’s ANI Technologies Private Limited, Flipkart etc. It was also contended by the assesse that the Parliament consciously has not brought to tax amount received from a non – resident for issue of shares and the capital receipt on account of share premium is not income. Section 68 is not applicable as source of credit is proved and is accepted. It is also contended by the assessee that Section 68 is accepted and not applicable as the source of credit is proved and is the amendment is wef AY 2013-14 and year nunder consideration is AY 12-13.The share application is by Non-resident and section 68 is applicable for resident investor only.

Court found that the Assessing Officer has mainly doubted the share premium received by the company. Court observed that the company has been found by fresh IIT graduates as a startup company looking to the future potential in online gaming business.The Assessing Officer has given categorically finding that the source of fund was not doubted. The Ld. CIT(A) has also decision of the Hon’ble Bombay High Court in the considered the case of Major Metal Ltd. v. UOI WP No. 397 of 2011 wherein the addition was sustained on the ground that genuineness of the transaction was notproved and creditworthiness of the creditor was also not proved whereas, in the present case the Assessing Officer has accepted the nature and source of funds. In our opinion, when the source of fundis not doubted by the Assessing Officer then he is not justified in making addition in terms of section 68 of the Act. Any addition for receipt of share premium having value more than the market value of the shares could be made in terms of section 56(2) of the Act and not u/s 68 of the Act. The Ld. CIT(A) has passed a reasoned order and we do not find any error in the same. Accordingly, court uphold the same. The grounds raised by the Revenue are accordingly dismissed.


The appeal filed by the Revenue is dismissed by the court.


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