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November 29, 2022

Section 68 cannot be invoked where the transactions are genuine and have been made through bank

Section 68 cannot be invoked where the transactions are genuine and have been made through bank

Facts and Issue of  the case

This appeal has been filed by the Revenue as against the order of the Ld.Commissioner of Income-tax (Appeals)-22, Mumbai dated 07/12/2016 passed under section 250 of the I.T. Act, 1961 which pertains to assessment year 2012-13.

The Ld.CIT(A) erred in deleting the addition of R.4,32,02,400/- under section 68 of the I.T. Act, 1961, on account of unexplained cash credit of share premium

The assessee company was formed on March 28, 2008. For the construction of a texturized yarn facility, it had purchased a plot of land in Surat. It was argued that the delay in the assessee company’s operations was caused by the need to finish the formalities associated with unit setup, adhere to governmental and local authority requirements, and secure a power supply. On September 29, 2012, the assessee submitted their income tax return, listing NIL as the entire income. The case of the assessee was chosen for investigation, and during the assessment proceedings it was discovered that the assessee company had received Rs. 4,32,02,400 in share application money, which the Assessing Officer believed to be inappropriate and that the investors’ sincerity was also insufficient.

On perusal of the balance-sheet it was observed by the Assessing Officer that the assessee company issued 10,80,060 shares having face value of Rs.10/- each at a premium of Rs.40 each to 11 applicants. The Assessing Officer held that though the assessee had proved the identity and creditworthiness of the share subscribers, the genuineness of the transaction was not proved was also of the view that the assessee has no proper means as per the P&L Account . The Assessing Officer had stated that the assessee has failed to furnish details regarding the investment and that the assessee has received the share premium at a huge sum of Rs.4,32,02,400/- on allotment of equity shares on face value of Rs.10/- each at a premium of Rs.40 per share. The Assessing Officer f the assessee which could attract such huge premium and that the initial capital of the assessee company was only Rs.3 lakhs.

The Assessing Officer also stated that no responsible corporation would invest in a company that had insufficient fixed and current assets as well as no profit margins. The Assessing Officer then concluded that the funds have been routed by flagship company and the group company and that the assessee was a medium for routing the funds. The Assessing Officer further believed that the company’s future prospects were uncertain because the assessee company had not engaged in any business activity during the contested year or any prior years.

The Assessing Officer concluded from this observation that the case involved money laundering and the diversion of its own funds through the issue of shares at a significant premium to sister firms. The Assessing Officer also took into account the fact that the lender’s return on investment was zero and that no prudent person would make such a risky advance; in other words, his return was lower than the interest rate on fixed deposits with banks. Additionally, it was claimed that since the assessee company’s founding, no dividends had been paid to shareholders, and that shares had been issued and allotted to subscribers at a hefty premium of Rs. 40 per share.

The Assessing Officer derived from these observations that the aforementioned transaction was not genuine and that the premium on shares set by the Assessee was unreasonable. The Assessing Officer added Rs. 4,32,02,400 as an unexplained cash credit under section 68 of the Act, citing the Bombay High Court’s ruling in Major Metals v. UOI Writ Petition No.397 of 2011 dated February 22, 2012, as support for this decision. The Assessee had failed to establish the sincerity of the transaction, according to the Assessing Officer. Aggrieved by this, the assessee was in appeal before the Ld.CIT(A).

Observation by court

The Ld.CIT(A) deleted the said addition on the ground that the payments for shares were received through banking channels for which the bank statements have been produced by the assessee and relied on various decisions which held that the genuineness of the transaction can be established if it is through banking channels. The Ld.CIT(A) distinguished the facts of the case relied upon by the Assessing Officer in the case of M/s Major Metals vs UOI (supra) and has also considered the break up value of shares given by the assessee to be justifiable. The Ld.CIT(A) has relied on the decision of Green Infra Ltd vs ITO (23013) 38 taxmann.com 253 (Mumbai) and has deleted the said addition on the above observation. The revenue is in appeal before us (ITAT) as against the order of Ld.CIT(A).

The Ld.DR relied on the order of the Assessing Officer and contended that the department was not aware of the subsequent progress of the assessee company. The Ld.DR further stated that the genuineness of the transaction was not proved by the assessee.

The Ld.AR, on the other hand, argued that the Assessing Officer was  satisfied with the parties’ identities and creditworthiness, , who also claimed that the assessee company has fixed assets in the form of Surat City land plots that were purchased during the 2008–2009 A.Y year for a total of Rs. 3,19,75,687 and whose value has significantly increased over the course of the year. The Ld.AR additionally noted that while calculating the premium on shares issued for determining the share’s break up value, the market value of the company’s assets must be taken into account. Due to the assessee company’s significant asset value, the Ld.CIT(A) was justified in deleting the addition made by the assessing officer on the transaction’s genuineness. From the case’s facts, it can be shown that the assessee has produced enough documentation to support the transaction. Additionally, the assessee claimed that the people who received shares in exchange for a premium were the relatives and close friends of the company’s directors. The assessee also claimed that the plot he bought was extremely valuable and that the government’s valuation rate for stamp duty purposes during the contested year was estimated to be Rs. 37,35,59,200

The assessee also stated that the market value of the company’s assets should be taken into account when determining the premium on shares. According to this calculation, during the assessment proceedings, the working of the break up value was arrayed at Rs.307.76, and the company had issued the shares at a value of Rs.50/-, consisting of Rs.10/- for share capital and Rs.40/- for premium. The assessee claims that the transaction was genuine because the share value of Rs. 40 per share was significantly lower than the share’s break up value. of share thereby establishing the genuineness of the transaction. The assessee relied on the decision of Green Infra Ltd vs ITO (supra), which held that “No doubt a non est company or a zero balance company asking for a share premium of Rs.490 per share defies all commercial prudence, but at the same time one cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they were to subscribe to such a heavy premium. The The revenue authorities cannot question the charging of such of huge premium without any bar from legislated law of the land. Details of subscribers were before the revenue authorities.”


From the above observations, ITAT considered view that the assessee has proved the identity, creditworthiness and genuineness of the transaction beyond reasonable doubt. The Assessing Officer has failed to establish his stand except for the fact that the premium was huge and that the assessee company has not commenced its operation. We find that there is no justification to invoke the provisions of section 68 of the I.T. Act in the present case where the transactions have been channeled through bank and that the identity and creditworthiness has already been established by the assessee.The Assessing Officer has not gone beyond this to prove that these were non genuine transactions nor has he substantiated with a valuation report determining that the share premium was huge and unacceptable. Respectfully Following the decision of the co-ordinate bench in Green Infra Ltd vs ITO(supra), we do not find any infirmity in the order of the Ld.CIT(A). Therefore,we uphold the decision of Ld.CIT(A) and dismiss the ground raised by the revenue.

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