By TIOL News Service

AHMEDABAD, MAY 14, 2018: THE ISSUE BEFORE THE COURT IS - Whether their can be a blanket exemption from applicability of section 68, regardless to the nature, amount and form of share application money received, for addition in the hands of the issuing company. NO IS THE VERDICT.

Facts of the case:

The assessee company, trading in yarn and textile, had filed return for relevant AY. Such return was accepted u/s 143(1) of the Act without scrutiny. An information was received from the ITO Ward 1(1)(4), Surat, that the companies shown to have invested money in form of share capital/share premium in assessee were shell companies indulged in providing accommodation entries. The AO observed that the amount was nothing but assessee company's own money introduced in the grab of share capital/share premium from the shell company and as such liable for taxation under the provisions of section 68 of the IT Act. The AO issued notice to reopen assessment as assessee company had failed to disclose full and true facts of its case. The assessee raised objections to the notice of reopening but such objections were rejected by the AO. Aggrieved assessee filed petition in High Court.

High Court held that,

++ return filed by the assessee was accepted u/s 143(1) without scrutiny. In such a situation, as held by the Supreme Court in case of Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd. there would be no question of change of opinion, since in absence of scrutiny assessment, the AO cannot be stated to have formed any opinion. The High Court in case of Inductotherm (India) P. Ltd. v. M. Gopalan, Deputy Commisssioner of Income tax, had held that " ..It would, thus, emerge that even in case of reopening of an assessment which was previously accepted u/s 143(1) of the Act without scrutiny, the AO would have power to reopen the assessment, provided he had some tangible material on the basis of which he could form a reason to believe that income chargeable to tax had escaped assessment. However, as held by the Apex Court in the case of Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd., and several other decisions, such reason to believe need not necessarily be a firm final decision of the AO";

++ in case of Commissioner of Income tax v. Empire Builtech P. Ltd. Division Bench of Delhi High Court allowed the Revenue's appeal and reversed the judgment of the Tribunal deleting addition u/s 68 of the Act in the hands of the company. Division Bench made following observations " It is not sufficient for the assessee to merely disclose the addresses or identities of the individuals concerned. The other way of looking at the matter is that having given the addresses, the inability of the noticees who are approached by the AO to afford any reasonable explanation as to how they got the amounts given the nature of their income which was disproportionally less than what they subscribed as share capital would also amount to the Revenue having discharged the onus if at all which fell upon it. This Court also notices that the assessee in this case was incorporated barely few months before the commencement of the assessment year, and there is no further information, or anything to indicate why its mark up of the share premium thousand folds in respect of the shares which were of the face value of 10 lakhs was justified.";

++ neither this Court nor other High Courts understood the judgment of the Supreme Court in case of Lovely Exports (P) Ltd. as to lay down a blanket proposition that no matter what the nature of transaction of share applications and receipt of the companies in form of share application money, under no circumstances, addition under section 68 of the Act, can be made in the hands of the company. Basic onus on the assessee to establish identity of the investor, genuineness of the transaction and creditworthiness attaches, also attaches on a company. There is a clear distinction between a situation where the company discharges its basic onus of providing details of the share applicants, genuineness of the transactions and their creditworthiness, but the Revenue still chases the company instead of inquiring with the investors if any mismatch or unexplained investments are found as compared to a situation where large scale share applications are found to be totally bogus transactions, are completely fictitious or stated to have been entered into by non existent persons or entities. The former is seen as a case where the company has discharged its own whereas the later would be a situation where the very genuineness of the transaction is in doubt. Therefore, the legal contention in this respect canvassed by the assessee was not accepted;

++ Division Bench of this Court in case of Aradhna Estate Pvt. Ltd v. Deputy Commissioner of Income tax Circle1 (1) had an occasion to deal with the assessee's challenge to the notice of reopening. One of the grounds raised was that u/s 68 of the Act, no additions can be made in the hands of the company concerning the share application. The Court rejected the contention making the following observations " .. the share application money received by the assessee from above noted companies was only by nature of accommodation entries and in reality, it was the funds of the assessee which was being rerouted. Undoubtedly. Section 68 of the Act would have applicability. Proviso added by the Finance Act 2012 with effect from 1.4.2013, does not change this position....";

++ as held by the Supreme Court in case of Rajesh Jhaveri Stock Brokers P. Ltd., the sufficiency of reasons cannot be gone into at this stage. Nevertheless, the AO must have tangible materials at his command to form a belief that the income chargeable to tax had escaped assessment. In present case, the AO referred to the materials available with him which prima facie suggested that the assessee company had received share capital and share premium from various companies which were proved to be bogus companies engaged in providing mere accommodation entries. After analysing such materials, he came to the conclusion that share capital/share premium amounting to Rs. 1.55 crores received by the assessee during the financial year 2009-2010 relevant to the present assessment year was bogus. It cannot be stated that the AO did not have tangible materials at his command to form such a belief. His reference to "materials on record" must be understood in the context of facts on record. The AO was not writing a statute. His expression therefore, cannot be seen with such rigidity. If therefore, he referred to the returns filed by the assessee and the accompanying documents as also materials received by him post acceptance of return, of course without scrutiny as "materials on record", he did not commit any legal error. He was ofcourse, referring to the materials placed for his consideration which enabled him to form such a belief;

++ there was no borrowed satisfaction. The AO had perused the materials and analysed the same so as to come to the conclusion that prima facie it suggested that the assessee had received large number of share applications/share premiums from the companies which were bogus companies and which engaged in providing accommodation entries. The Revenue has filed affidavit stating that before issuing notice, sanction was granted by the competent authority. A statement on oath, in absence of any contrary material on record need not be disbelieved. In the result, petition is dismissed.

(See 2018-TIOL-905-HC-AHM-IT)