Identity capacity & genuineness fell apart when companies were non-existent

Identity capacity and genuineness of creditors fell apart when shareholder companies was found to be non-existent – High Court 

In a recent judgment, Hon’ble High Court of Chhattisgarh has confirmed the addition on account of share application money received from bogus shell companies observing that proof of identity of creditors and their capacity of creditors to advance money and genuineness of transaction fell apart when company was found to be non-existent.

ABCAUS Case Law Citation:
ABCAUS 4130 (2024) (07) HC

Important Case Laws relied upon:
Principal Commissioner of Income Tax (Central-1) Vs. NRA Iron and Steel Private Limited (2019) 15 SCC 529

In the instant case, the assessee had challenged the order passed by the ITAT in confirming the order passed by the Commissioner of Income Tax (Appeals) upholding addition u/s 68 of the Income Tax Act, 1961 (the Act).

The assessee was a Private Limited Company. he case of the assessee company was selected for complete scrutiny to verify the share premium received during the year under consideration whereas the company had shown low income in comparison to high loans & advances and investment in share and the investment made in unlisted equities.

Subsequently, in order to verify the genuineness and creditworthiness of the shareholding companies, a notice was issued under Section 133(6) of the Act to Kolkata based share companies at their registered address.

The notices were returned unserved, consequently, the Assessment Officer deputed one Inspector to find out the identity of the companies. On a verification, it was found that the companies did not exist. Since the credible explanation regarding the amount credited to the company was not explained, the amount of unexplained cash credit was added under Section 68 of the Act on account of share application money received from bogus shell companies, which actually belong to the appellant.

Both CIT(A) and ITAT confirmed the addition.

The Hon’ble High Court observed that the Hon’ble Supreme Court has laid down the parameters and the issues which arises for determination whether the assessee had discharged the primary onus to establish the genuineness of the transaction required under Section 68 of the Act. It primarily laid down that the initial onus is on the assessee to establish proof of identity of the creditors; capacity of creditors to advance money; and genuineness of transaction.

The Hon’ble High Court rejected the submission of the appellant that since the original beneficiary was another company, it cannot be assessed for the said tax liability. If the notices were issued to two shareholder company and they were found to be fake/non-existent, the appellant company could not fall back to say that another company was the original beneficiary as had been held that the practice of conversion of unaccounted money through the cloak of share capital/premium must be subjected to careful scrutiny.

The Hon’ble High Court further observed that the initial enquiry which came to fore revealed that on close scrutiny the investment which was made by the said two companies their proof of identity of creditors and the capacity of creditors to advance money and genuineness of transaction fell apart when the company was found to be non-existent.

The Hon’ble High Court also noted that the Hon’ble Supreme Court has held that the practice of conversion of unaccounted money through the cloak of share capital/premium must be subjected to careful scrutiny. This would be particularly so in the case of private placement of shares, where a higher onus is required to be placed on the assessee since the information is within the personal knowledge of the assessee. The assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the assessee.

Thus, following the judgment of the Hon’ble Supreme Court, the Hon’ble High Court held that the onus of Section 68 of the Act is to be discharged by the assessee which it failed to do so.

In the result, the appeal is dismissed.

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