AO should have factual proof that benefit of bogus premium was passed : ITAT

AO should have factual proof that benefit of bogus premium was passed : ITAT

Bogus share premium: The fact that the premium is abnormally high as per test of human probabilities is not sufficient. AO should not resort to rely on circumstantial evidence or on test of human probabilities but on factual evidence that benefit has been passed to the shareholders/ directors.

Directions were issued to AO to establish if the assessee company was simply used as a vehicle to pass on the benefit to shareholders/directors

ITAT Hyderabad in matter of Bharathi Cement Corporation Pvt. Ltd., Hyderabad. vs. Asst. Commissioner of Income-tax, Circle 2(3), Hyderabad.

AO should have factual proof that benefit of bogus premium was passed : ITAT

Extract of Order is given below for referance :

9.3 Again, we also cannot presume or apply test of human probabilities, we are dealing with the business transaction, it has to be based on cogent material. Considering the whole situation, in our considered view, the AO/CIT(A) have restricted themselves by stopping the investigation based on circumstantial evidence and applying test of human probabilities. In order to lift the corporate veil for the purpose of determining whether any benefit is passed on to the shareholders/directors, they have to bring on record proper evidence/cogent material. We direct the AO to redo the assessment keeping in mind that no doubt the assessee has received this capital receipt and what circumstances which lead to investment is not important but whether the assessee company was used as a vehicle to pass on the benefit to shareholders/directors. In this regard, we direct the AO to make the assessment as below:

a) We noticed that assessee has declared loss in AY 2010-11 as per Income-tax Act, Rs. 189.76 crores and in cash flow, they are declaring decrease in cash from operating activities to the extent of Rs. 71.94 crores. On careful analysis, it can be seen that assessee received through share capital Rs. 181.99 crores and secured borrowings Rs. 334.47 cores but made investment in fixed assets to the extent of Rs. 370.75 crores. The investment in fixed assets are already covered in secured borrowings, the decrease in cash from operation has to be verified properly.

b) He has to verify whether any benefit is passed on to shareholders/ directors through other means as the assessee is declaring huge loss in the initial years of operation itself.

Therefore, this issue is remitted back to the AO for re-verification as per above direction and in simple terms, verify all the funds and cash flow management of the company for both AYs 2009-10 & 2010-11. AO should not resort to rely on circumstantial evidence or on test of human probabilities but on factual evidence of passing of benefit to the shareholders/directors. Hence, grounds of appeal raised by the assessee are allowed for statistical purposes.

10. As the facts and grounds raised in AY 2010-11 are materially identical to AY 2009-10, following the conclusions drawn therein, the grounds raised in this appeal are also treated as allowed for statistical purposes.

11. In the result, both the appeals of the assessee are allowed for statistical purposes.

Pronounced in the open Court on 10th August, 2018.