Bogus share capital entry to obtain bank loan. Addition us 68 remanded back to verify facts in view of re-casted audited balance sheet and ROC filing-ITAT

Bogus share capital entry to obtain bank loan. Addition made u/s 68 remanded back to verify facts in view of re-casted and revised audited balance sheet and ROC filing-ITAT

Bogus share capital entry to obtain bank loan

ABCAUS Case Law Citation:
1031 (2016) (10) ITAT

Brief Facts of the Case:
The was a provate limited company engaged in the business of engineering, erection and commissioning and consultancy in Oil and Gas industry. The Assessing Officer (AO) during the course of assessment proceedings u/s 143(3) rws 143(2) of the Income Tax Act, 1961 observed that there was an increase in issued share capital Rs. 70 lakhs and share application money Rs. 2,49,3500/- (Total Rs. 3,19,2,49,35,000/-) both amounts was subscribed by only one subscriber. When asked to explain regarding the source of share subscription and share application money, the assessee replied that the said subscriber was one of the Directors of the company and the whole amount of Rs. 3.19 crores represent machinery, tools , equipments etc. transferred from proprietorship firm of the subscriber which stands represented in his capital balance.

However, on verification it was found by the AO that the capital balance filed along with the return of income by the subscriber did not corroborate with the claim of the assessee company.

Thus, the AO held that the subscriber was not having enough salary to substantiate such a capital balance and the income disclosed in the return of income by him was very less as compared to the capital balance. It was observed by the AO that the assessee company cooked up the capital account to explain the capital balance. Ultimately, the amount of Rs. 3.19 crores was taxed by the AO in the hands of the assessee company as unexplained cash credit u/s. 68 vide assessment order u/s 143(3).

CIT(A) after hearing the contentions of the assessee company confirmed the additions.

Aggrieved by the order passed by the CIT(A), the assessee went in appeal before the Tribunal.

Contentions of the assessee:
Before the ITAT, the company filed additional evidences for admission claiming them as going to the root of the matter and be admitted in the substantial interest of justice.

The assessee submitted that the assessee had in fact not received any money towards share capital of Rs. 3,19,35,000/- during the assessment year as is reflected in the books of account. It was submitted that these were mere fictitious entries made by the assessee in the books of account which does not exist and the same was undertaken with a view to avail bank loan from Bank of Baroda in order to be eligible to get the sufficient additional loans from the Bank.

It was also submitted that the assessee has revised and recasted the accounts whereby all the fictitious entries were deleted from the books of account , which are now duly audited by the auditors of the company being qualified chartered accountants who have issued audit report dated along with re-casted audited financial statements forming part of additional evidences.

It was requested that the matter may be remanded back to the CIT(A) for verification of all these additional evidences and claim of the assessee may be adjudicated on merits. It was submitted that the addition u/s 68 was not sustainable as there were in-fact no cash credits to the tune of Rs.3.15 crores which was supported by affidavit filed by the subscriber as additional evidence along with re-casted audited financial statements. It was said that the revised audited accounts were also duly filed with the Ministry of Corporate Affairs. The company also produced the Resolution passed by it enabling it to recast and revise its financial statements.

Observations made by the ITAT:
The Tribunal observed that as per the claim of the assessee company the entries related to raising of share capital and share application money as made in the books of accounts amounting to Rs.3,15,00,000/- were bogus and fictitious and was made in order to raise more loans from the bank while the fact of the matter is that no such share capital was ever raised by the assessee company. It was stated that the manipulations in the books of accounts had been eliminated now, /financial statements were recast and duly audited.

The company produced copies of Resolutions along with forms filed with Ministry of Corporate affairs O/o Registrar of Companies for filing revised and re-casted audited accounts. The copy of notice of Extra-ordinary General Meeting(EGM) , Board Resolutions and Resolutions passed at EGM were also filed.

The company also produced sanction letters from Bank of Baroda to substantiate that the loans/limits were enhanced by the bank in favour of the assessee company which was made possible only because the assessee manipulated its accounts to show higher share capital/share application money to the tune of Rs. 3.15 crores which was fictitious entry.

The ITAT opined that the additional evidences filed went to the root of the matter and needed to be admitted and adjudicated on merits in order to advance substantial justice. However, the ITAT stated that the contentions of the assessee company and the additional evidences so filed need verification in order to identify and assess the real income of the company and to advance substantial justice.

The issues were set aside and restored to the file of the CIT(A) for de-novo determination of the issue on merits after considering and evaluating new evidences and explanations submitted by the assessee during the set aside proceedings.

Bogus share capital entry to obtain bank loan

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