In a recent decision by the Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ), the question of the genuineness of investments made by small-time investors in a limited company was addressed. In light of the observations made by the Bench, the Assessing Officer ( AO ) was directed by the Bench to delete Additions it had made to the income of the Assessee alleging failure to produce requisite details to verify the shareholders’ creditworthiness.
Two appeals were filed before the ITAT Bench by the Assistant Commissioner of Income Taxes against the Assessee, Subharti Media Ltd. and vice versa. Both appeals were filed before the ITAT following the decisions passed by the Learned Commissioner of Income Taxes [ CIT(A) ] in 2 separate matters pertaining to Assessment Years ( A.Y. ) 2010-11 and 2009-10.
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The cases were lodged following a search and seizure operation conducted by the Revenue Department on the premises of M/s Subharti KKB Charitable Trust and Dr. Atul Krishan group of cases, yielding power under Section 132 of the Income Tax Act, 1961 on 12.11.2010. A number of documents concerning the finances of the Petitioner Assessee M/s Subharti Media Ltd. were unearthed during the operation, prompting the Revenue Department to initiate Assessment proceedings under Section 153C of the Income Tax Act and issue notice under Section 153C read with Section 153A of the Income Tax Act.
During scrutiny of the balance sheet of the Assessee company, also observed that there were ‘filled-up unsigned share applications forms for the issue of shares purchased in the Assessee company’. In light of this discovery, the Assessee was required “to file confirmed copies of accounts, copies of ITR and bank statements of share applications to prove the identity, creditworthiness and the genuineness of the creditors”.
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The AO further issued summons under Section 131 of the Income Tax Act to a number of shareholders whom the AO deemed to be unverifiable by means of their share application money. The total share application money of the above-mentioned unverified shareholders amounting to Rs.2,19,91,020/- was classified as unverified credit under Section 68 of the Income Tax Act. Further, an addition of Rs.2,19,86,960/- was made by the AO asserting that the Assessee has not filed requisite confirmed copies of accounts, copies of ITRs and bank statements of the shareholders.
The claims of the department were refuted by the Assessee who claimed that all the necessary documents, namely, bank statements, confirmations, PAN and Income Tax Returns of the ‘unverified’ shareholders have been duly submitted by the shareholders who are also regular Income Tax Assessees. Subsequently, when the matter came up before the CIT(A), the bench proceeded to delete the additions of Rs.2,19,86,960/- made by the AO owing to the absence of any adverse finding by the AO which would indicate that the ‘unverified’ shareholders do not hold ample creditworthiness and financial responsibility to have invested in the Assessee company.
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The Counsel for the Assessee further relied on the cases of CIT vs. Nav Bharat Duplex Ltd. (2013) and CIT vs. J.D. Securities and Finance Ltd. (2013) to establish that once the identities, addresses, bank statements, PAN details and other particulars have been adduced by the shareholders, it is enough evidence to establish their veracity and “the onus on the assessee to prove the source of share application money stands discharged”. In the event that the AO is still not satisfied with the evidence, the AO is permitted to verify the same.
The AO determined that the Assessee had not disclosed an income of Rs.22,02,620/- for the A.Y. 2009-10 and proceeded to add the same to the income of the Assessee for the A.Y. as unexplained credit under Section 68 of the Income Tax Act while citing that the Assessee has not filed confirmations from the share applicants who had purchased the same.
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The two-member Bench of the Delhi ITAT comprising Challa Nagendra Prasad, Judicial Member and Avdhesh Kumar Mishra, Accountant Member observed that a considerable number of shareholders are all small time investors who have invested amounts ranging from Rs.480/- to Rs.60,000/-.
The Bench further affirmed that the creditworthiness of these small-time investors cannot be doubted merely on the basis that the Assessee has not filed ITRs and bank statements of these investors; if the identities of the shareholders have been duly established by the Assessee, it shall suffice. In conclusion, the Bench directed the AO to delete the addition of Rs.22,02,620/- on the basis of the above findings.
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