The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that where the Assessing Officer conducts detailed enquiries revealing serious doubts regarding the identity, creditworthiness and genuineness of alleged share subscribers, the protection available under judicial precedents such as Lovely Exports Pvt. Ltd. cannot be mechanically applied. The Tribunal restored an addition of Rs.21.37 crore made under Section 68 in respect of share capital and share premium received by a closely held company.

A survey under Section 133A was conducted in the case of M/s Vishal Gold & Precious Stones Pvt. Ltd. During the survey, blank signed share transfer forms and other documents relating to various companies were allegedly found. The Assessing Officer treated these documents as indicating a possible accommodation-entry arrangement involving share capital and share premium received by the assessee.

During assessment proceedings, the AO examined numerous entities that had subscribed to the assessee’s shares. According to the assessment order, several notices remained unserved, many parties did not respond, and in certain cases the amounts confirmed by the alleged investors did not tally with the figures shown by the assessee. The AO further noted that shares allegedly issued at a premium of Rs.190 per share were subsequently transferred at only ₹10 per share, creating further doubts regarding the genuineness of the transactions.

The CIT(A) granted substantial relief. Relying mainly on decisions such as Lovely Exports and Divine Leasing & Finance Ltd., the CIT(A) deleted most of the share capital addition (except Rs.85 lakh), deleted the commission addition, deleted the addition relating to sundry creditors and also removed the GP addition. The Revenue challenged the relief granted by the CIT(A) before the Tribunal.

The Tribunal observed that while the assessee had filed substantial documentation relating to the investors, the AO had independently conducted enquiries which raised serious doubts regarding the existence and credibility of many of the alleged subscribers.

The ITAT partly allowed the Revenue’s appeal. It restored the addition of Rs.21.37 crore made under Section 68 on account of share capital and share premium, holding that the assessee had failed to establish the identity, creditworthiness and genuineness of the alleged investors despite extensive opportunities. The deletion of the commission addition of Rs.74.81 lakh was upheld. The issue relating to sundry creditors was remanded to the AO for fresh verification, while the GP addition was substantially reduced by directing application of a 7% gross profit rate instead of 18.35%.

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