Decision cited :

In the case of CIT v. M/s. Gagandeep Infrastructure Pvt. Ltd. (ITA No. 1613 of 2014), order dt. 20/03/2017 and Pr. CIT v. M/s. SDB Estate Pvt. Ltd. (ITA No. 1356 of 2015), order dt. 27/03/2018 the Bombay High Court has held that the requirement to explain the source of the source of the funds in respect of the investment as shareholders in which the public are not substantially interested as share application money is only prospective as it is introduced w.e.f. 1st April, 2013.  

In the case of CIT v. Nipun Builder & Developers Pvt. Ltd. (2013) 350 ITR 407 (Delhi) the hon’ble Court has held that there has been no examination by the Tribunal of the assessment proceedings in any detail in order to demonstrate that the assessee has discharged its onus to prove not only the identity of the share applicants, but also their creditworthiness and the genuineness of the transactions.  

Acelegal Analysis :

The issue of applicability of section 68 in fresh issue of shares surprisingly has been litigation oriented. Now considering online filing of returns, all information about an investor is easily available with the department and ROC. Hence, the assessee’s burden to prove existence, genuineness and creditworthiness should considerably reduce with furnishing of basic documents as in the instant case. It is an important case as it dilutes the armageddon of the amendment w.e.f. AY 2013-14 laying thereby that if the investor has furnished affidavit along with bank details showing investment, the creditworthiness and source of source stands proved.

Facts of the case :

A survey action was conducted on M/s. Globe Pharma by Investigation wing. During the course of survey, it was found that M/s. Globe Pharma was issuing bogus accommodation bills to various concerns including the assessee and its sister companies. Consequently, a search operation was conducted on the premises of the assessee and its sister companies. On the date of search, the Director disclosed total additional income of Rs.24 crores. The said admission was retracted by the Director on the very next day. Subsequently, notice u/s. 153B of the Act was issued for AYs 2005-06 to 2009-10. Thereafter, assessment orders were passed u/s. 153(3) r.w.s. 153A thereby making additions on account of introduction of share capital as “unexplained cash credit” u/s. 68.

Proceedings before CIT(A) :

In Appeal, the CIT(A) confirmed the addition on account of unexplained cash credit under Section 68 of the Act relating to introduction of share capital.

Proceedings before ITAT :

The ITAT deleted the addition stating that the transactions have been made in cheque duly reflected in the bank statements and no adverse inferences have been drawn in this respect nor any verification from the bank have been made by the AO for making the impugned addition. The entire addition has been made only on the basis of admission of the Director during the course of search proceedings.  However, the admission was retracted by the Director on the very next day. Further, the addition is based on the surmises that cash was reintroduced in the form of share capital by the assessee.  However, there is no demonstrative evidence brought on record which could justify the additions made by the AO.

Proceedings before High Court :

The Revenue contested that (i) the identity and creditworthiness of the shareholders is not established; and (ii) the genuineness of the transaction has not been established.

High Court’s verdict :

(i)         Identity of shareholders established by assessee by filing the following documents before AO :

-        PAN numbers allotted to shareholders ;

-        Affidavits of shareholders pointing out that they had invested in the shares of the assessee out of their own bank accounts ;

-        Copies of acknowledgement of return of income of the shareholders ;  and

-        The assessee also requested the AO to summon the shareholders.

(ii)     Whether source of source established :

-     It was only with effect from 1st April, 2013 i.e. from AY 2013-14 that a proviso was added to Section 68 which required the person investing in shares of any Company to satisfy, the source of the funds which enabled the investments in shares. This appeal pertains to period prior to that. Even otherwise, the shareholders have filed affidavits stating that the investment was made from their bank account. Thus, the initial burden was discharged by the assessee in respect of creditworthiness of the investor and nothing has been shown by the Revenue to doubt the same and/or steps taken and result thereof. Therefore, the decision of Delhi High Court in the case of Nipun Builder & Developers Pvt. Ltd. (supra) is not applicable.

(iii)    Whether genuineness of investment established :

-        Revenue placed reliance on statement of Kamlesh Jain who was an employee, as well as, the shareholder of the assessee and on the fact that during the course of the search, certain blank transfer forms were found in the possession of the assessee.

-        However, the said statement relied upon by the Revenue deals with Kamlesh Jain investment in group company and not with investment made in the assessee company. The statement does not in any manner, state that the investment made in the assessee company was an investment which he did not want to make. Moreover, the assessee has submitted copies of the share application form, share allotment Register and Bank Statements showing receipt of funds in addition to (i) above to establish the genuineness of the investment.