Sec 68 addition not justified if identity, creditworthiness & genuineness of investors has been proved: ITAT

Facts of the case, in brief, are that the assessee is a company and filed its return of income on 28.08.2016 declaring an income of Rs.1,46,020/-. The return was processed under section 143(1) of the Income Tax Act, 1961. Subsequently, the case was selected for limited scrutiny under CASS to verify whether the funds received in the form of share premium are from disclosed sources and have been correctly offered for tax. Accordingly, notice under sections 143(2) and 142(1) of the I.T. Act, 1961 was issued to the assessee calling for various details. In response to the same, the assessee filed the requisite details from time to time.

During the course of assessment proceedings, the A.O. noted that the assessee company has received Rs. 42 lakhs as share premium on 60000 shares.

In order to verify the identity and creditworthiness of the investors and the genuineness of the transaction, the A.O. issued a notice under section 133(6) of the I.T. Act, 1961. However, no response was received from these persons, for which, the A.O. asked the assessee to explain why the same should not be added to the total income of the assessee. Rejecting the various explanations given by the assessee, the A.O. made the addition of Rs. 48 lakhs to the total income of the assessee by invoking the provisions of Section 68 of the I.T. Act, 1961.

In appeal, the Ld. CIT(A) dismissed the appeal filed by the assessee by confirming the addition of Rs. 48 lakhs made by the A.O. under section 68 read with a proviso. The Ld. CIT(A) also rejected the valuation report justifying the premium charge in respect of such shares as furnished by the assessee and held that the share premium received by the assessee is in excess of face value as income of the assessee under section 56(a)(vii)(b) of the I.T. Act, 1961 on protective basis. Thus, the Ld. CIT(A) enhanced the income of the assessee by Rs.42 lakhs for the A.Y. 2016-17.

Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before the Income Tax Appellate Tribunal (ITAT).

Argument of Taxpayer

Learned Counsel for the Assessee submitted that the assessee during the course of assessment proceedings has filed the copy of income tax return along with computation of income, P & L A/c, Auditor’s Report, Balance Sheet with Audited Financial Statements, Memorandum of Association and Articles of Association and Certificate of Incorporation of the Investor Companies. The assessee has also filed the bank statement, details of share premium receipt along with name, PAN, address etc., and valuation report under Rule 11UA(2)(a) of the I.T. Act, 1961. The assessee company had filed the relevant documents from the parties of allottee of shares during the year. Despite all these details filed by the assessee, the lower authorities have brushed aside all these things and the A.O. made the addition which has been sustained by the Ld. CIT(A). Learned Counsel for the Assessee drew the attention of the Bench to the valuation report placed at Page No.80 of the PB according to which the book value of the share by the Auditors comes to Rs.80/-. Referring to the decision of the Tribunal in assessee’s own case for the immediately preceding assessment year, he submitted that under identical circumstances, the Tribunal has deleted the addition made by the A.O. and upheld by the Ld. CIT(A).

He submitted that although the valuation report was furnished before the lower authorities to justify that shares issued by the assessee were on fair market value which was computed in accordance with Rule 11UA(2)(a) of the I.T. Rules, 1962, however, the lower authorities have rejected such valuation furnished by the assessee by holding that the assessee is not having any worth of receiving any share premium. He submitted that the issue has already been decided in favour of the assessee by the Tribunal in assessee’s own case. Therefore, the order of the Ld. CIT(A) be set aside and the grounds raised by the assessee should be allowed.

Argument of Department

The Ld. D.R. on the other hand, heavily relied on the order of the A.O. and the Ld. CIT(A).

ITAT Order:

7.8. Since the assessee in the instant case has proved the identity of the investors and filed sufficient details to substantiate the creditworthiness and genuineness of the transaction, therefore, respectfully following the decisions cited (supra), I hold that the Ld. CIT(A) was not justified in confirming the addition made by the A.O. under section 68 of the I.T. Act, 1961. I, therefore, set aside the Order of the Ld. CIT(A) and delete the addition. Grounds raised by the assessee are allowed.