CIT(A) was justified in considering surrounding circumstances, the normal human conduct of a prudent investor, the probabilities to judge creditworthiness of investors – High Court
In a recent judgment, Hon’ble Calcutta High Court has held that surrounding circumstances, the normal human conduct of a prudent investor, the probabilities are important to judge credit worthiness of investors
ABCAUS Case Law Citation:
ABCAUS 3997 (2024) (05) HC
Important Case Laws relied upon:
M/s. Pee Are Securities Limited Versus Deputy Commissioner of Income Tax
Principal Commissioner of Income Tax Versus Anmol Stainless Private Limited
Commissioner of Income Tax Versus N.R. Portfolio Private Limited
Rajmandir Estates Private Limited Versus Principal Commissioner of Income Tax
Principal Commissioner of Income Tax Versus NRA Iron and Steel Private Limited
Roshan Di Hatti Versus Commissioner of Income Tax
Principal Commissioner of Income Tax, Kolkata Versus Swati Bajaj
Yadu Hari Dalmia Versus Commissioner of Income Tax
In the instant case, the Income Tax Department had challenged the order passed by passed by the Income Tax Appellate Tribunal (ITAT/Tribunal) deleting the addition made u/s 68 of the Income Tax Act, 1961 (the Act) on account of unexplained cash credit when neither the identity and creditworthiness of the creditors nor the genuineness of the transactions had been established.
The assessee company had issued shares at premium to 5 companies and received share application money. The assessee was directed to produce the bank statements, books of account, Profit and loss, balance sheet, computation and returns of share-holders and directors of the companies.
The investor companies submitted a few documents but none of the directors appeared before the Assessing Office for recording statement.
After considering all the materials the Assessing Officer held that the assessee company entered into a share transaction with the investor to introduce the unaccounted income in form of share application/allotment; they did not have any regular business transaction or regular acquaintance with the investors; the investors had no reason to invest such huge amount in the business of the assessee and the entire transaction was done to circumvent the provision of the Act.
Under such circumstances the entire share application/ allotment money was added back under Section 68 of the Act as undisclosed cash credit. The assessee was informed that penalty proceedings under Section 271(1)(c) is being initiated separately.
The CIT(A) examined the bank accounts of the five companies and came to the conclusion that the bank account were being used solely for the purpose of receiving and issuing cheques and there hardly remained any significant balance in the account.
Further on examination of the return of income and bank statements of the investors, the CIT(A) held that the investors who purchased the shares of the assessee company at a premium for had neither NIL or negligible revenue from operations and the returns were either of loss or of insignificant incomes below taxable limits. Their balance sheet showed that even though they did not earn anything, they invite huge investments in their accounts and this money is then used to make further investments at a high premium in other companies, and they also extended unsecured loans to other companies, therefore money obtained from the route of share premium was re-routed for supplying sources of receipt of money to other companies. The circuit of investments remained within a group of companies and in this manner through a circular routing of funds, the capital of each of the companies was enhanced and this inflated capital is then used for providing loans etc. to desired entities.
The CIT(A) after taking note of the various decisions noted that the onus of establishing the identity, creditworthiness and genuineness of the share transaction was not discharged by the assessee. Further the assessee had not followed any of the guidelines issued by the Reserve Bank of India or the Institute of Chartered Accountants of India for ascertaining the value of extra-ordinary high premium.
Accordingly, the CIT(A) dismissed the appeal.
The assessee carried the matter on appeal to the tribunal contending that all the share applicants were assessed to income tax and the entire share application money was received through proper banking channels and thus the addition made by the assessing officer and confirmed by the CIT(A) was unjustified.
The Tribunal held that holds that the assessee has proved the identity of the share subscribers. That the share applicants are group companies of the assessee companies, they are the body corporate registered with the Registrar of Companies and they were available in the given address. The tribunal stated that the share applicants had furnished copy of PAN and were registered with ROC having CIM and all the data was available with the income tax department and ROC. The share applicants are assessed to income tax regularly, the share application money was received through banking channels, the shareholders had sufficient funds for the purpose of investment and the investments are reflected in their bank accounts and the shareholders had confirmed the transactions.
Further the tribunal held that the assessee was a in an industry and the future prospects of the assessee was great, that they were in needs of funds as they were expanding its operations and at the given point of time there was increase in fixed assets and the turnover of the assessee increased by 73% and the reason to invest also included strategic relation and are made by the associates/group companies having directors directly related to assessee’s director.
The tribunal faulted the assessing officer and the CIT(A) for having not brought on record any evidence to show that it was the assessee’s own funds that was brought back in the form of share application money. Further the CIT(A) had not pointed any doubt or discrepancy with regard to the identity of the investor and the only finding rendered by the CIT(A) was that the investor companies had low income.
Thus, the tribunal held that the findings rendered by the CIT(A) were not enough to prove that any unaccounted money of the assessee had been introduced in the assessee company warranting addition under Section 68 of the Act.
Before the Hon’ble High Court the Revenue contended that the assessee might have established the identity and creditworthiness of the share applicants at the relevant time but the third and the most important ingredient namely genuineness of the transaction has to be established and unless and until all the three factors are conjointly established, the revenue was fully justified in invoking Section 68 of the Act.
The Hon’ble High Court observed that the CIT(A) had examined the factual position and had analysed the pattern of the transactions in the bank accounts of the five investor companies to that of the assessee’s bank account. They had received cheques from somewhere and has immediately issued in favour of another company and the balance remaining in the account was very meagre the bank account had been operated solely for the purpose of rotating money.
The Hon’ble High Court further noted that the analysis done by the CIT(A) would reveal the nature and character of the transaction and the CIT(A) cannot be faulted to have held that the transactions were well planned and stage managed to show genuineness behind which a clean and simple “round tripping” of funds is taking place. The CIT(A) on examination of the facts found that the bank accounts act as “highway” in the “journey of money” on a rotation and laundry trial from one entity to another and by this way these bank accounts create a façade of documentary evidence for clean money in the form of account payee cheques for any kind of accommodation entries.
Further, the Hon’ble High Court noted that CIT(A) also analysed the return of income, bank statements etc. and found that the investors have purchased the shares of the assessee at a premium and all have shown similar characteristics, the revenue from operations were either nil or are negligible; the returns are either of loss or of insignificant income below taxable limit; they had been issued shares at very high premium without having earned any revenue from business operations; they had invested on shares at very high premium in companies who also have not earned anything from business operations; their balance sheet shows that even though they do not earn anything, they invite huge investments in their accounts and this money was used to make further investments at high premiums in other companies and they have also issued unsecured loans to other companies; money obtained from the route of share premium was rerouted for supplying sources of receipts of money to other companies; the circuit of investments remains within a group companies and in this manner through a circular routing of funds, the capital of each of the companies is enhanced and this inflated capital was then used for providing loans etc. to desired entities; the bank accounts showed huge sums are received from one concern through cheques or RTGS and immediately diverted to other companies of the group and the bank balance remains negligible before and after such transfers; each of these companies invested in each other at very high premiums even though there was no business conducted; there was no reason or logic provided by any of the companies as to on what basis they arrived at the value of premium on shares to be issued as neither the assessee nor its investors had followed the guidelines of RBI or ICAI or any other guidelines for determining the rate of premium on their shares. Thus, the fixing of rate for premium is arbitrary and devoid of any financial or accounting rationale; the investors have not bothered to ensure protection of their investments.
The Hon’ble High Court opined that the mere fact that the transactions were though banking channels or that the companies where income tax assessees or registered with Registrar of Companies can in no manner be sufficient to discharge the onus under Section 68 of the Act.
The Hon’ble High Court stated that the tribunal did not examine the factual matrix in the depth and in the manner it ought to have done. Therefore, it is justified to hold that the findings rendered by the tribunal were perverse.
The Hon’ble High Court further observed that tt may be true that the identity of the investor company had been established as they are registered with the Registrar of Companies and they are regularly assessed to income tax. Assuming that at the relevant point of time when the investor companies invested in the assessee company by purchasing shares at high premium, they had sufficient funds in the bank accounts, the question would be as to whether this by itself will establish the creditworthiness of the investor companies. This is a fit case where the doctrine of “source of source” or “origin of origin” should be made applicable. Because the CIT(A) had brought the evidence and the materials on record which manifestly showed the involvement of the assessee as the Directors of the five investors companies and the Director of the assessee company were all closely related.
The Hon’ble High Court opined that the question was not whether the identity of the investor had to be established but the question was whether the investor had requisite creditworthiness and whether such creditworthiness was a make belief situation by means of a circular transaction and if the same had been established. The tribunal had held that the findings rendered by the CIT(A) that the assets in the form of investments had been created through rotating of money in between the group companies and the assets mainly consists of cash and cash equivalents were not enough to prove that any unaccounted money of the assessee had been introduced in the assessee company warranting addition under Section 68 of the Act. This finding in our opinion upon consideration of the facts is perverse. The Hon’ble High Court opined.
The Hon’ble High Court opined that the CIT(A) was right in adopting a logical process of reasoning considering the totality of the facts and circumstances surrounding the allegations made against the assessee taking note of the minimum and proximate facts and circumstances surrounding the events on which charges were founded so as to reach a reasonable conclusion and rightly applied the test that a reasonable/prudent man would apply to arrive at a conclusion.
The Hon’ble High Court opined that it was convinced to hold that the assessee had not established the capacity of the investors to advance moneys for purchase of above shares at a high premium. The credit worthiness of those investors companies was questionable and the explanation offered by the assessee, at any stretch of imagination cannot be construed to be a satisfactory explanation of the nature of the source. The assessee miserably failed to establish genuineness of the transaction by cogent and credible evidence and that the investments made in its share capital were genuine.
In the light of the above findings, the Hon’ble High Court held that the assessee had failed to discharge legal obligation to prove the genuineness of the transaction and the credit worthiness of the investor which had shown to be so by a “round tripping” of funds. Accordingly, the appeal of the Revenue was allowed and the order passed by the Tribunal was set aside and the order passed by the CIT(A) was restored.
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