Share application money circular transaction addition u/s 68 deleted where loan creditors had subscribed

Share application money circular transaction addition u/s 68 deleted where loan creditors had subscribed out of the loans repaid by the company-ITAT upholds findings of CIT(A) as identity, genuineness of transaction and creditworthiness of subscribers were not doubted

Section 68 of the Income Tax Act, 1961 (Act) contains provisions governing additions for unexplained cash credits. According to the section where any sum is found credited in the books of the assessee for any previous year and the assessee fails to offer satisfactory explanation as to the nature and the source of the same to the Assessing Officer (AO), such sum, may be taxed as income of the assessee.

As per settled Law, in such transactions, the initial onus is upon the assessee to prove the identity of the party/source of money, credit worthiness/capacity of the parties and genuineness of the transactions. Once the said onus is discharged by the assessee, the onus of proof shifts to the Income Tax Department (ITD/Revenue) if it wants to tax the said transaction as income of the assessee.

In the instant case law, a controversy consists of share application money being treated as income of the assessee company by considering it a circular transaction of its own money.

Share application money circular transaction

Share application money circular transaction by loan creditors

ABCAUS Case Law Citation:
ABCAUS 2158 (2018) (01) ITAT

The Challenge/Grievance:
This income tax appeal was filed under Section 260-A of the Income Tax Act, 1961 (the Act) by the Income Tax Department (ITD/Revenue) against the order passed by the Commissioner of Income Tax (Appeal) deleting the addition made by the Assessing Officer (AO) on account of unexplained share application u/s 68.

Grounds raised by the appellant Revenue:
The Revenue alleged the company routing of its own money and then carrying out a circular transaction wherein share applicants were used as a conduit to increase appellant company’s capital.

It was also alleged that the assessee had failed to establish the identity, creditworthiness and genuineness during the assessment stage.

Brief Facts of the Case:
The respondent assessee was a company engaged in the business of civil construction. The case of the assessee was taken for scrutiny and assessment u/s 143(3) was framed. The Assessing Officer observed that the assessee had introduced the share application money from eleven different persons. The Assessing Officer was of the view that the assessee had routed its own money through circular transaction. The AO therefore, made addition u/s 68 of the amount of share application money received.

Against the order of the AO, the assessee preferred an appeal before the CIT(A) who after considering the submissions allowed the appeal of the assessee.

Observations made by the Tribunal:
The Tribunal noted that as per the observations made by the AO, the company had transferred money to each of the subscribers which within a short span of 1-2 days had been repaid to the company.

However the CIT(A) recorded the findings that the company clearly been brought out that all the 11 subscribers were shareholders/relatives or friends of the directors of the company who were also the unsecured creditors of the company. During the relevant assessment year, the company had repaid the amounts of loan to the above subscribers and who in turn had invested in the shares of the company by cheque.

In remand report submitted to the CIT(A), the AO acknowledged that the source of funds for share application money stood explainable. However, he stated that the appeal of the assessee company may be decided on merits.

The ITAT noted that CIT-A had deleted the addition after going through the copies of Return of Income (ROI) of the creditors/ subscribers along with their ledger accounts as creditors.  Thus the CIT-A had arrived at the opinion that the AO was not justified in making addition on account of subscription of shares by 11 persons because the AO had not disputed the identity, genuineness of transaction and creditworthiness of subscribers. The CIT-A had ordered that the AO shall be at liberty to examine the source of investment of the subscribers in their hands after taking into account relevant source of income etc.

Decision/ Conclusion/Held:
Considering that the findings on fact recorded by the CIT-A were not controverted by the Revenue as the source of fund was admitted by the subscriber and the CIT(A) had given liberty to the Assessing Officer to examine the source of investment by the subscriber in their hands, the ITAT dismissed the appeal as not been able to see any reason to interfere into the finding recorded.

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