Whether source of funds for share capital is explained is, a question of fact not giving rise to any substantial question of law – High Court
Whether source of funds for share capital is explained is, essentially, a question of fact not giving rise to any substantial question of law – In a recent judgment, Delhi High Court dismissed appeal of the Income Tax Department.
ABCAUS Case Law Citation:
4643 (2025) (07) abcaus.in HC
In the instant case, the Income Tax Department had challenged the order passed by the Income Tax Appellate Tribunal in deleting the addition made u/s 68 of the Income Tax Act, 1961 (the Act).
The respondent assessee was a private limited company. The return of the assessee was picked up for scrutiny on account of large share premium received during the relevant period.
The AO observed that assessee had received share capital from three companies. The AO issued notices under Section 133(6) of the Act to the aforesaid share applicants. However, the said entities did not respond to the said notices. In the given circumstances, the AO held that the total sum received by the assessee from the said entities remained unexplained and was taxable under Section 68 of the Act.
The CIT(A) allowed the appeal of the assessee holding that the assessee had discharged the initial onus under Section 68 of the Act by providing sufficient documents including bank details of the share applicants, copies of the bank statements, copies of the income tax return of the investor companies and the data from the MCA website. The said data reflected that the investor companies were live companies. The investor companies were also assessed to income tax and their final accounts indicated that sufficient funds were available with them. Thus, they had the ability to make the investments.
The Revenue preferred an appeal before the ITAT. The ITAT found that the investors had throughout confirmed their investments and there is no allegation that the capital receipts were the Assessee’s money.
The Tribunal observed that the investors were corporate entities duly assessed to tax and had made investment through banking channel from their own sources which fact had neither been denied nor rebutted in the assessment nor by the first appellate authority.
The Tribunal held that the assessee had discharged the primary onus cast upon it by provisions of section 68 of the Act. It was not the case of the Revenue that the assessee was a beneficiary of accommodation entry.
Before the Hon’ble High Court, the Income Tax Department contended that the assessee had received share capital from the three investor companies and further invested the same in the similar companies. It is canvassed on behalf of the Revenue that the assessee was one of the entities used for transfer of funds to the downstream investment companies.
The Hon’ble High Court observed that the question whether the assessee has produced relevant material to explain the source of its resources is essentially a question of fact. However, even if the Revenue’s contention that the assessee was conduit for passing funds from investor companies to downstream investee companies is accepted, the question of assessing the receipts as income of assessee would not arise. This is because it is implicit that the amounts received is not the assessee’s income.
Accordingly, the Tribunal held that the question whether the source of the funds is explained is, essentially, a question of fact. In view of the ITAT’s findings, the Hon’ble High Court held that no substantial question of law arises for consideration of the High Court.
The appeal was, accordingly, dismissed.
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