For investment in share capital, source of investment is outside the control of the investee company

In case of investment in share capital, the source of investment may remain outside the control of the investee company.

In a recent judgment, Allahabad High Court has held in the case of investment in share capital, it is the investor company is to be assessed with respect to the amount invested, as the source of investment may remain outside the control of the investee company.

ABCAUS Case Law Citation:
5159 (2026) (06) abacus.in HC

A search & seizure action was conducted by Director of Income Tax (Inv), Unit -VI(2), New Delhi in the Surendra Kumar Jain Group of cases. During the course of post search Investigations and while examining the seized documents it was observed that two persons were engaged in the business of providing accommodation entries to large number of beneficiary companies through various paper and dummy companies floated and controlled by them.

Accommodation entries were provided to the beneficiary companies through cheques/PO/DD in lieu of cash charging a certain amount of commission for the same. During the year the assessee company had received share capital of Rs 400,00,000/- on account of Share capital at premium from a company run by the said entities.

The case of the assessee was selected for scrutiny by the Directorate of Income Tax (System) through CASS. Notice under Section 143(2) of the Act dated 12.08.2013 was issued. Various notices under Section 142(1) of the Act were issued calling for specific evidence, explanation and clarifications. The AO required the appellant to explain the credit of share capital and share premium and after considering the evidences filed before him, reached a conclusion that the appellant could not prove the identity and creditworthiness of the share investor and genuineness of the transaction with him. As a result, the A.O. made addition of Rs.4,00,00,000/- u/s 68 in the hands of the assessee.

The CIT(A) held that the genuineness of the transaction stood proved and the A.O. had wrongly doubted the same.

Before the Tribunal, the Revenue contended that the documents as provided by the Investigating wing clearly suggested that at one side the company operative were receiving the money in cash, depositing in their sister concern and then transferring to the company for further transfer to the entry seeking beneficiary companies. Perusal of Bank A/c of investor company revealed that just before or after issue of cheque to assessee company there were credit entries of matching amount in the bank.

It was submitted that the investor company’s Profit & Loss Account clearly establishes this incoming & outgoing as the Investor Company was having negligible income from operations. It clearly shows that the investor company’s main activity was to route the money to the respective beneficiary company on commission basis. Merely furnishing of the copies of the bank account of the investor company, share application, balance-sheet is not sufficient to prove their creditworthiness.

However, the Tribunal noted that the CIT(A) had observed that the AO had placed heavy reliance on the report/information received from the Investigation wing, stating that the documents provided by the Investigation Wing clearly suggested that at one side the investor company was receiving the money in cash, depositing in their sister concern and then transferring to the investor company for further transfer to entry seeker company. On this basis, he held that the money was given by the appellant company and was received back to its through grab of share application money and share premium on it.

The CIT(A) had further noted that the identity of the investor stood proved from MCA website. The identity was further proved by the facts on record that the investor was a limited company, whose shares are listed at stock exchange and is an ISO 90012008 certified company.

Further, the CIT(A) observed that the AO had not brought on record any documentary evidence to hold that the transaction in bank accounts were not genuine. The A.O. had not carried out any enquiry on the information from investigation wing of the department and has not brought on record any evidence that money of the appellant was used at any stage of the transactions. There was no cash deposit in the bank account of the investor before issuance of cheques/RTGS towards share money to the assessee. The investor had filed explanation of the sources of the entries in its bank account credited prior to the payments to the appellant for share investment and the AO had neither controverted nor disproved the same.

In view of the discussion and observations of the CIT(A), the Tribunal opined that it was apparent on record that appellant/assessee had received share investments through banking channel. The AO had not brought on record any documentary evidence to show that the bank transactions brought were not genuine. Before the Bench also, the Department of Revenue had not produced any evidence in support of grounds of appeal.

Accordingly, the appeal of the Revenue was dismissed. Not satisfied the Revenue challenged the order of the ITAT before Hon’ble Allahabad High Court.

The Hon’ble High Court observed that Commissioner of Income Tax (Appeals) had recorded categorical findings confirming the genuine activity of the assessee. To the extent, the assessee was not a shell entity and further to the extent, it had invited investment in its share capital, the fact that said investment made by investor company may have been added at the hands of the assessee only if evidence may existed of that money having been passed on by the assessee itself. However, it was not the case of the revenue, and further to the extent, the revenue alleged that certain third party were operating the investor company and Investment Company, the addition may have been made at other hands under other provision of law. So far as the present assessee was concerned, it was the recipient of the amount invested. The amount in issue is share capital received from third party. Which third party was to be assessed with respect to the amount invested, may remain outside the control of the assessee and may have no bearing on it’s assessment.

As a result, the Hon’ble High Court held that the reasoning of the Tribunal, confirming the order of the CIT (Appeal) cannot be faulted.

Accordingly, in absence of any element of perversity or other serious doubt, the appeal was dismissed.

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